I am an advocate of having a good portion of your financial investments in a permanent portfolio setup.  For conservative investors, you can really just put all of your investments in the permanent portfolio.

This may not include other portions of your net worth.  For Americans, most of their wealth is tied up in their primary residence. Most of the rest is in retirement accounts, such as a 401k plan.  You can set up part of a permanent portfolio in a 401k plan, but it is difficult to buy gold.  Sometimes it is possible to buy PRPFX, the mutual fund that somewhat mimics the permanent portfolio.

In terms of calculating your net worth, I don’t think you should include all of the junk in your life.  I think most people know what I mean by this.  In addition, something such as your smartphone isn’t an asset that should be included in your net worth, even if it is a tool for you.  In terms of money, it is most likely a liability, as you pay money every month in order to use it.

Even a car probably shouldn’t count towards your net worth, unless perhaps if you are flipping cars or buying collectibles.

It is a little trickier with houses.  As Robert Kiyosaki says, most people don’t understand that a house is a liability.  You do need somewhere to live, but most people who own a house have a lot more than what they reasonably need.  Don’t get me wrong; I am not saying that you shouldn’t have a nice house that you enjoy.  It’s just that you need to be careful in counting it towards your net worth.  In many cases, that house is a massive roadblock to achieving significant savings, let alone financial independence.

Still, there is a difference between someone who owns a $200,000 house with a $200,000 mortgage versus someone who owns a $200,000 house with a $100,000 mortgage.  The person with no mortgage and a paid off house is even better.

I think there are many advantages in paying off your mortgage.  However, the one major exception is that you shouldn’t do it for the tradeoff of having zero or little cash (or really cash equivalents).

Liquidity and Less Anxiety

There is one area in which I agree wholeheartedly with most financial advisors.  I agree that it is important to have an emergency fund.  I think 6 months of living expenses is a good start, although 9 months may be even better.

It does depend on your situation.  If you are 23 years old and living with your parents, your living expenses may be pretty low. In that sense, it should be easy to get at least 6 months of living expenses saved.  But on the other hand, you may not need to do this because your risks are low and nobody else is depending on you.  This is especially true if you have a low wage. If you have a job making $10 per hour and you get fired, then it probably won’t be that hard to find another job that pays a similar wage.

If you have a large family and you are the primary breadwinner, then you may want even more of a cushion than 6 to 9 months of living expenses.  It really is a personal situation.

But for most people, it is important to have liquidity.  You don’t have to have all cash (or digital equivalents).  You don’t have to have all of your money in a checking account of money market fund.  If you have $50,000 saved up, which covers 9 months of expenses, then it is probably ok to put some of that in a permanent portfolio, as you are unlikely to lose a large percentage due to market conditions.  Even here though, I would still keep the 25% cash portion in some kind of money market fund or some easily accessible vehicle.

I think the biggest problem for most people is that they don’t have liquidity.  Most of their net worth is in their house and their retirement plan.  Unless you are planning to sell your house or do a cash-out refinance, then your money is locked up.  And even there, it takes time to do those things to access the money.

In the case of taking money out of retirement plans, you will owe an early withdrawal penalty if you are younger than the designated retirement age, and you will owe income taxes on top of this, unless it is something like a Roth IRA or Roth 401k. Worst of all, if you have a 401k and you still work for the company that sponsors it, then you probably can’t withdraw any of “your” money at all.  In other words, there is no liquidity.

We sometimes hear that cash is king, and I believe it is true to a certain extent.  If you are worth a million dollars, I certainly don’t recommend having any more than 25% in cash and cash equivalents. But if you are worth $10,000, then I think it is probably best to have that sitting in some kind of checking account or money market fund.  The only exception might be that 23 year old, who is living with his parents, and who is using the money to fund a startup business.

It is nice to have cash, especially in a recession, when other assets are down.  You can purchase them when they are “on sale”. But I think there is a bigger benefit here, and that is your emotional state.  When you have liquidity, you feel more powerful.

If you have money set aside that is easily accessible, then it reduces money stress.  If you have an expensive car repair or you need a new air conditioning unit for your house, then having that liquidity makes it less stressful.  It’s not that you will enjoy paying for such things, but you won’t be in a panic. It won’t really impact your day-to-day life in any significant way.

There is an equation in all of this:

Liquidity = Less Anxiety

This is the real reason that cash is king.  It reduces the stress in your life.  It makes something unpleasant far more bearable.  When something unexpected pops up, you dip into your reserves, and you move on with your life.

With stocks in a likely bubble, and with a possible recession on the horizon, I think having liquid funds set aside is all the more important right now.  You aren’t going to regret having some money set aside for a rainy day.  As long as price inflation isn’t running rampant, then this safety premium isn’t costing you much at all, except for possibly missing out on some gains in other investments.