At the same time, I am also the first person to tell you that a good cash position is one of the keys to investment success. Personal finance and investing go hand-in-hand in this case. I tell my members that they need to keep more cash than they think they need on hand.



Once they have that cash, they need to continue to add cash on a regular basis. Personal finance experts will tell you to keep 3-6 months of expenses available in an "emergency fund". Personally, I think that may not be enough. Three to six months of expenses is a good start, but in the case of a true emergency, it may not cover everything. Not to mention the fact that there are times when you have some unexpected expenses that may not qualify as emergency. I ask my members, "What would you do if those unexpected expenses happen for a couple of months in a row?"

Many times there isn't a good answer to that question. The answer I get most is they will tap into their investment portfolio or their real estate equity. The problem with this line of thinking is that, no matter what, they start to go backward financially. If they take a loan on their property, the cash to pay the loan back comes out of money that could go to investing, not to mention that they have to pay interest and not earn it.

Taking money out of your investment portfolio is even worse. Not only will there probably be a tax penalty, depending on the type of investment account, but every dollar taken out loses it's power to compound and create more wealth. When the investment account is raided, many times it can never recover because there is no sense of urgency to get the spent money back into the account, not to mention the time lost that the money could be compounding.

Overall, I recommend six months of gross income as a minimum in cash. Six months of expenses can be taken in many different ways. Six months of gross income is a much more objective number than six months of expenses. You do not need to put off investing until you get to six months of gross income.

Here is how to balance building cash with investing. Imagine you have $100 per month to invest. The whole $100 per month should go into a cash account until you have 3 months of gross income saved. At that point, you want to scale down a little but you are still aggressively building your cash account. You should now be putting $75 of that $100 into your cash account and begin building your investment account with the other $25. Once you are at 6 months of gross income in cash, you should start adding more to your investment account and less to cash. Adding $15 of the $100 per month to cash is a good guideline.

If you need to make a withdrawal for any reason, go back to the stage and contribution level. For example, if the cash withdrawal brings your cash balance below 3 months of your gross income, your cash contributions should go back to $100 per month.

Make sure you are continually building your cash stockpile. You never know what life will throw at you. Build a cash fortress to protect you and your investments from the uncertainties of life.