A common misconception of the wealthy is that they have an abundant amount of cash lying around Scrooge McDuck style. In reality, a wealthy individual will have significantly less cash than you relative to their net worth.
While having a lot of cash around like you’re a rap music video or having a fat bank account like the movies can be exciting, once you begin to accumulate a large amount of cash, your number one goal would be to reduce it. That’s because holding cash for a long period of time will cause you to lose money.
Imagine you earned a $10,000 five years ago. Prices of almost every kind of product have risen, meaning you wouldn’t be able to buy as much as you could have with that money today. That effectively means the $10K you’ve earned has lost value, and despite remaining the same number, might have the same purchasing power today as only nine or eight thousand dollars.
This is intentional by design. The federal reserve seeks to have a healthy amount of inflation every year so that money is continually being invested in the economy. Cash lingering under mattresses or idle bank accounts is something we want to avoid.
If you own a business, having a cash is king mindset will be even costlier. If you hold onto cash beyond what you need to sustain the business in an emergency, you could be losing millions of dollars to inflation and not even notice. You wouldn’t have just lost money to inflation though. That capital could have been deployed in your company and returned three, three, or ten times the amount of money you put in. Over the long-term, that can mean the difference between perpetual small business status or a fast growing company.
Now that you understand how cash is trash, you know why the wealthy always aim to hold as little cash as possible.
