Despite having over a decade of experience in business, I still find myself navigating the complexities of cash flow and the psychology surrounding money. The challenge lies in balancing rational financial decisions with the instinctual desire for security.
For example, it is rationally different to splurge your money on inessential products, or to invest it in future growth by expanding revenue lines. However, the emotional response when looking at an empty personal bank account very much feels the same. Slight fear, anxiety and worry for the immediate future can be overwhelming.
With inflation, shrinkflation and stagflation being common in modern economies due to government debt and quantitative easing, it makes even less sense to hold cash. The value of money is eroded quicker than you can earn interest to preserve your value. In the modern economy, assets ownership is the only strategy from inflationary pressures.
Investing in bonds, stocks or properties will yield stable returns of 3-15%, provided you pick the right vehicle at the right time, with good judgment. Some instruments are also less liquid than others, but might hold their value better in volatile times. However, as we have seen in the nft and crypto bust, even assets purported to be detached with the traditional economy also followed the same boom-bust cycle.
When we build businesses, we aim to breakeven in 2 years, and after which realize profits. Sometimes when reality deviates from plan, it extends to 3 years, or we might cut losses and exit the venture. Hence, it is prudent to make multiple bets, diversify, and experiment in different industries. In many sense, being an entrepreneur or an investor is quite similar. As long as you are right 70% of the time, in the long run you will be profitable.
As a business owner, if the breakeven is 3 years, the annual ROI is 33%. With experience, hindsight and speed of execution, you can reduce the breakeven to 2 years, or 50% ROI. It’s impossible to find such returns anywhere, except in your own business, hence logically you would be a fool to keep your networth in cash and not invest most of it in your business, or in other people’s business in private or public markets.
While writing this, I learnt the Rule of 72 only applies to 6-10% interest rates, and does not apply to large interest rates as it does not allow time for compounding.
I personally maintain a cash reserve equivalent to 12 months of future expenses, while actively seeking investment opportunities for the remainder. During tight periods where we need to pump money into the company for cash flow, or when investment opportunities present itself, my personal cash float may drop to three months.
In any case, valuable investment opportunities only knock once and are rare to come by, while cash can be earned or borrowed personally or company’s future earnings. In my opinion, the value of opportunity is significantly higher than the cash holdings in your bank.
Every decision we make is value-driven to create maximum long term ROI. That is why despite owning more than 15 gyms, 4 trading businesses, and some other smaller investments in public and private markets, I choose to stay in public housing and drive a COE car. It still works, and my cash can work harder elsewhere.
Regardless of the mental challenges and perceived uncertainty of being cash poor, it is likely I would continue this path for the foreseeable future as it is the most logical path in today’s world.
PS. I must admit this idea was not immediately apparent to me, but learned through experiences with my business partner who is always worried whenever we have excess cash not deployed in good time.
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