Have you ever heard the phrase that “cash is king?”
Yep. We have too. As financial advisors focused on wealth management in Manchester, it is our job to debunk myths and provide proper financial education for our clients. Therefore we wanted to look at this phrase today and see if there is any truth behind the anecdote. Certainly, on the surface, the theory seems sound and logical. You might even live by the rhetoric. But should you be?
Where does this phrase come from?
We take it cash is king comes from the fact that money is important. You need money to buy shelter, buy food, buy water and just about anything else on this planet. It’s an economic planet and the language understood by everyone in the world is money. Seems fair enough. Without cash you are a pauper and cash is king. Got it.
How do you get cash?
Assuming we are doing everything legally, 95% of us get our cash from income. What we mean is a business or a job. The income we get from the job or business pays us an income in the form of cash. There are still other, more favourable ways of getting cash though. More on that in a second.
Cash is only valued if used.
That’s right. Without using the money, I.E trading your money for something, your money is useless. It is simply fancy designed paper! Remember this: money has no value unless used. It seems obvious but it is not the money that is important, it is what you are using it for.
Here at this company we are advocates of spending money wisely. Namely investing, saving for events (day of investing, retirement etc.), increasing income and so on.
Is cash still king despite it being paper? Well, kind of, what else would be used if not this ‘worthless’ paper? Well, there’s something better than cash.
What is better than cash?
Firstly, cash flow trumps cash. Income is essential for every single person and business (we are all businesses anyway) in order to survive. Without new money, you will eventually run out of your current money.
So, with that in mind, your income, (your job or your business) is more important than the cash you have right now, because that generates cash flow.
We believe that cash flow is the king for the reasons mentioned above.
But there is a big problem with your cash flow if it all comes from ‘income’.
Income is taxed at the highest rates. So, if you manage to build your income into the fix figure range or the seven and eight figure range, you are looking at a massive percentage of that going back to the government.
But cash flow is king! Is there anything to be done to combat this?
There is! The secret of maximising cash flow is….
Cash flow from assets through investments!
Cash flow from investments are:
Easier to protect than income
For example, a solid investment is not going to go away like your income might. You can quite easily lose the capacity to earn income through your job.
Or your company could get sued. Or someone could copy and perfect your business model. Or you could be made redundant and a load more reasons.
Now, not all assets are totally stable, but lots of job and business style incomes can go up in flames overnight.
Asset income resides in a lower tax bracket than job/business income
Where you might be getting taxed 50% for a job income source, you could be making more through your properties let’s say and only be taxed 20%. The difference is night and day across time. Your cash flow is far stronger.
Assets work so you don’t have to
Lots of investments and assets work without you having to put in many hours into them. For example, we manage investment accounts for clients, or advise on the best places to invest money. Obviously when you are working at your job, you are having to spend time to get that money.
So remember, cash flow is king, not cash. Invest the cash you make to make more cash flow.
Or, do you still think cash is really king?
Ideally, this will be cash flow that receives the benefits of coming from something like property. Your tax will be less, you will be less likely to lose that cash flow, you can get other benefits like protecting your money and not spending (or wasting it) and so on.
If you are in the position of not having enough money to invest, keep working on your cash flow. Keep your cash flow increasing until one day you have enough to set aside to start investing into cash producing assets and investments.
It takes a lot of discipline to make money and store the money for a future event. Most can’t help but blow their money on things like cars. Don’t do this! Store to use the money. Follow what the super rich to do understand how to properly build wealth.
It’s hard to know when the right time is to invest. Ideally, your cash flow should be high (it’s all relative so it’s hard to put numbers to this) and you will have stored money, saved money incase of an emergency and so on. If you want to invest, feel free to speak to our team who will be able to give you guidance on some of your best options.
Also published on Medium.