What's your 'cash' goal?

[alexlee]

I'm not sure this makes too much sense but bear with me....

I was speaking to a friend the other day about investing and money. He makes good money, is able to save, and last year bought a nice PPOR with his wife, but no other investments. He said he was speaking to a few of his friends earlier, and they raised the question 'how much money do you need to retire?' The answers varied, but the point is that they were talking about how much CASH they needed to retire. I don't know whether his friends have investments or not.

I said, you know, I don't think like that. As an investor, I have cash either because I sold some stuff because I thought it was overvalued, or I have specific plans for it (e.g. now I'm putting together cash as a deposit for my PPOR). I would think more along the lines of what cashflow I want to generate and what asset mix I would be comfortable with in terms of gearing and risk. I really can't imagine a time when I would ever be 100% long cash and just earn interest income (spectre of inflation in the background).

Yet my friend kept saying it was only a hypothetical, but I said such a weird goal will probably skew your path and plans to get there. I mean, how do you make a plan for having, say, $5m cash?

Is this something people have observed in non-investors (that is, they focus far too much on 'cash' and not 'assets')? It's slightly different from the net worth v cashflow thing.
Alex

 

[burty85]

I have a lot of friends that think that buying houses is bad coz that the det that you have, they dont understand that there is good and bad det, ie a girl i know took out a $40,000 loan for a new 4x4 but at the same time i asked if she was looking to buy a house, she said that she didnt want a big det, I for sure am happy driving my busted up commodore and having a $300,000 home loan and looking for more to add to it as in the long term it will generate income and also have the CG over the life of the loan, as with the car loan she will come out paying lots for less.... Some people just dont look long term and think that they can get every thing now with credit and pers loans....

 

[twobobsworth]

I can understand if people towards the end of their life want to convert their assets to cash and live off the interest. Low risk and you don't have to think about anything.

 

[aussierogue]

I cant

I 'can't' understand converting assets to cash and living of the interest - no capital gains!!!

You can get the same cashflow result and prospects of increasing your capital wealth - why park your money?

 

[Sunfish]

Is this something people have observed in non-investors (that is, they focus far too much on 'cash' and not 'assets')?

I'll change that a little to: Is this something people have observed in non-thinkers (that is, they focus far too much on 'cost' and not 'worth'.

A pet hate of mine is 'greenies' who talk about the "cost" of ethanol or a wind turbine or solar cells without thinking that they have no "worth" if they need more energy to produce than the energy they will return during their economic life.

Sorry! A little off topic, I know.

 

[alexlee]

I've always thought that setting the wrong goal wastes a lot of time. I don't mean a morally or ethically correct goal, but what I've observed is that many people have goals that are fundamentally different from what they actually want. e.g. many say they want to climb the corporate ladder, etc, spend a lot of years towards that goal, then find they wanted something else (more time with family, etc) after all.

I wonder if aiming for '$x in the bank' similarly distorts your path. My goal is to have a mix of property shares and cash producing $x, and I know roughly how to get there. I simply can't imagine the mindset it would take to get to just having cash in the bank?
Alex

 

[The Y-man]

Replacing the words "cash in bank" with "net worth" might make more sense.

Cheers,

The Y-man

 

[alexlee]

Replacing the words "cash in bank" with "net worth" might make more sense.

Cheers,

The Y-man

Exactly. Most people think 'net worth' (though usually non-property-investors don't tack too much debt into that analysis). We think net assets, gross assets (because that's where the growth comes off), AND cashflow. I don't really understand why you would aim for a 'cash' goal without having any plan on how to get there.
Alex

 

[wylie]

I think that sometimes people will talk about a cash amount because often a figure is quoted, ie. "if you want $70K per annum in retirement, you will need $xxx invested".

I have never thought "gee I need that amount in cash". I always equate the figure quoted with "net assets", including superannuation, at the time of retirement.

So, I think it is just people using the wrong terms. Anyway, I hope so, because I don't know anyone saving up cash in the bank as their main retirement strategy.

Wylie

 

[buzzlightyear]

I have generally found that as soon as I have had amassed a relatively decent amount of 'cash' in the bank, either through tax returns, work bonuses etc, it has almost always coincided with an IP purchase. In fact, I always seem to be negotiating a 5% deposit as I am trying to spread my limited cash as far possible.

I must admit, there is a sense of comfort having $xx,000 sitting in the bank. Although the flip side, is the feeling of missing out on other opportunities by sitting on the money.

Personally, my view on the normal level of cash in sitting in my offset account, is as a buffer for unseen circumstances and general living expenses. A means to an end.

The notion of having cash in the bank, I suspect stems from people's aversion to risk and views on investing. If you are not used to investing and using leverage, then I believe you will find these people are far more risk averse (or is that the other way around!), and having cash in the bank mitigates this risk. For those who are far more exposed to the concepts of leverage, and being comfortable with carrying susbstantial debt, cash (or at least cash in the bank) may not be as important.

 

[kissfan]

I can understand if people towards the end of their life want to convert their assets to cash and live off the interest. Low risk and you don't have to think about anything.

I 'can't' understand converting assets to cash and living of the interest - no capital gains!!!

You can get the same cashflow result and prospects of increasing your capital wealth - why park your money?

I don't mind the idea of selling down some I/P's to pay down debt AND also buy income producing mgd funds/shares.

Of course I'm referring to that stage when someone has done their sums and worked out how much they need to live on comfortably and can do it by selling down some assets.

Personally I'd like to sell down some I/P's to reduce debt and do something like mentioned above BUT still hang on to a few I/P's that will still have capital growth so I can keep on feeding the machine.

Regards
Marty

 

[Meisterin]

I know that when my mother thinks of net wealth it means "cash in the bank" and my father thinks of "net asset" that can(may but may not)generate cash return.

And my mother prefer to have cash and just earn interest from the bank, because all she has to do is log on and take the money out via internet banking and it is easy to do tax returns. No complex issues to explain when it comes to auditing. I think it due to her lack of English and the want of trying to avoid any hassles with any person in authority and because she doesn't have particular desire to have more money !!! Even though she knows there are investment vehicles out there that can generate more return than high interest bank accounts, she doesn't want to get involved in signing forms, speaking to people etc in English. Stick to what she understands best in her head.

My father has been persuaded to take my mother's view point over the years because of his failure with his own investment for retirement which he bought for cash flow. He has lost over $1 million dollars(can't sell the assets anymore, as there is no buyer) in failed ventures and now believes that having cash and good shares without any leverage is the best way to go for retirement.

"No point in structuring, leveraging etc when you have enough capital to spend for the rest of your life, as we don't plan to pass any to our children"

And boy they do lead very ascetic and spendthrift life to make their capital last.

 

[Rixter]

Its the basic fundamental difference between the 'haves' & 'have nots' -

The poor & middle class think cash flow.

while........The rich & wealthy think capital!

 

[Kenster]

In Kiyosaki's terms, Cash = Tax payable, Assets = Tax deferred.

The problem with holding cash is it attracts regular tax. Tax when money is earned. Tax when money is accumulated. Tax when money produces income. The taxes would reduce the compounding effect on the money accumulated over time, significantly.

Not to mention possible loss of social benefits when we'd need it most, at old age, when we are frail and can no longer work. The most important is government subsidy on medical supplies and services.

Best approach is to use the cashflow to accumulate as many tax-deferred assets as possible in a protected environment (like trusts), and let the compounding do the wonder.

Ah, so nice to have the too-much money problem...

 

[quoll]

I find people still have the "debt is bad" pump money into super and try to get large super to fund their retirement. Very hard work.

Yet even stranger are investors that talk about "selling up" "cashing in" at retirement.

My way of thinking is so far removed from these people it is really hard to understand how they think this. Even though I thought like that 10yrs ago, seems like a lifetime ago.

I agree with Alex you work on how much income do I want what asset mix do I need to generate this income. EASY.

cheers
quoll

 

[alexlee]

I told my friend 'you know real investors would never really think like that. They would view excessive cash as a lost opportunity, not to mention you'd have to pay a lot of tax to get there in the first place.

He said it was just a hypothetical. But I place a lot of importance on these hypotheticals, since your thoughts will influence your actions. If I'm only aiming for cash in the bank, I'm going to avoid a lot of investments that seem to be counterintuitive to that (illiquid property, for example).
Alex

 

[kaf]

I wouldn't be so hard on your friends - although I wasn't there for the conversation so not sure how much they insisted on actual "cash" in the bank. I guess it's a bit like the opposite, but just as irrelevant property investor question of how many houses you need to retire...

Irrelevant as it's not the number of the houses but the value / net worth that counts and the income provided. Like most people here at SS I guess when I tally up my numbers and how far we've come it's based on capital values and net worth, irrespective of asset class (cash value is the common denominator of all the asset classes). So I guess I look at it as if it was cash on my tally sheet even though I have no intention to turn it into that.

Or am I missing the point of the discussion?

Cheers

kaf

 

[quoll]

Like most people here at SS I guess when I tally up my numbers and how far we've come it's based on capital values and net worth, irrespective of asset class (cash value is the common denominator of all the asset classes). So I guess I look at it as if it was cash on my tally sheet even though I have no intention to turn it into that.

Or am I missing the point of the discussion?

In some regards we are missing the point, we just don't understand or can't remember the poor/rich spender way of thinking.

But I agree CASH could be used to mean, cash in bank or cash in bed or gold or super or assets. You just don't know.

cheers
quoll

 

[alexlee]

I have to say, net assets doesn't mean as much to me as it used to. Probably because I've seen it climb rather rapidly with the supposed increases in Brisbane property prices, but it doesn't affect me day to day.

I'm more focused on gross assets (because that's what drives growth) and cashflow (which determines whether I can hold the asset or not and as it becomes positive it provides me with income).

The concept of aiming for 'cash' seems so alien.
Alex

 

[Kenster]

I'm more focused on gross assets (because that's what drives growth) and cashflow (which determines whether I can hold the asset or not and as it becomes positive it provides me with income).

Beyond Gross assets and Cashflow is Passive income, which can provide us the freedom to "Do what I want, where I want, when I want", without worrying about the erosion of asset base that other cash extraction methods like LOE presents.