Why is Cash Important?

Cash is important because it provides individuals and families with liquidity. This means
that you are able to pay off your obligations on time even if bad times hit. Let’s consider
a couple with only one income and no debts – no credit card balance. I know this may
not realistic but let’s be conservative. So what happens if the earning partner is laid off
for a couple of months? How will the rent and bills be paid? A couple of options include
taking out a short term loan, dip into overdraft protection, use credit cards, or borrow
money from family members. However, what is the likelihood of an unemployed couple,
even one without any debt, qualifying for a loan. As well, any of these options come with
hefty costs – even borrowing from your family members.
Liquidity is also imperative for unforeseen health issues that may arise. For example, for
most dental work the patient is required to make payment upfront and is then
reimbursed my their insurance provider. If you’ve ever had dental problems you know
that when the pain strikes you need immediate treatment. Once again, of course the
expenses can be charged to credit cards, etc. However, if there are payment issues
from your insurance company, they will not cover your interest charges. Moreover,
medical emergencies can be more severe and expensive then this and although we
couldn’t possibly be ready for all of life’s misfortunes we can try to combat some.
The importance of cash is aligned with the significance of having an emergency fund.
As previously emphasized it is imperative, especially in today’s economy, to have an
emergency fund set up. It is equally important to have most, approximately 80%, of your
emergency fund in cash or cash equivalent instruments. This allows you liquidity in
order to meet obligations even if you are faced with dire circumstances.