There are myriad reasons to have adequate liquid reserves on hand these days. The obvious are job loss, emergency funds required for friends/family in need and more. However, what about the ability to capitalize on a purchase that you would have made anyway, but one where a significant benefit could be realized by paying with cash?

These days, paying with cash doesn't normally carry the same weight it used to. When I negotiated my first car deal out of college, I thought I was wielding some sort herculean leverage with the car dealer when I quipped that I could pay a substantial amount of the final negotiated price in cash. The dealer essentially smirked and shrugged his shoulders. It was when I brought out the full arsenal, relaying my own Purchase Price Analysis I used to calculate HIS price he paid for the car that I finally got his attention (another post on optimal car buying strategies to follow soon!). Anyway, a few weeks ago, I came across a situation that DID warrant a cash payment that wouldn't have come to fruition if I were living hand to mouth or relied solely on credit for my purchases.

As promised, for my wife's 30th, instead of throwing her a lavish party, she wanted a new china cabinet. I figured it's a big milestone and we could afford some new furniture (and maybe I can finally buy myself a 21st century television as an MBA graduation gift in the spring without hearing that I wouldn't get let her indulge for her 30th), so we did some shopping at local retailers. Of course, the Bombays of the world were a little out of our price range, so we tried a few other stores as well as a high end outlet mall thinking they'd have reasonable pricing. For the style she liked, there were more than I had anticipated, ranging from $3,000 to $4,500. We decided to look around some more and perhaps try the Mennonites in PA where we got our bedroom furniture all those years back.

Well, as luck would have it, we were driving home one day and one of those North Carolina furniture trucks was parked on the side of the road and my wife screamed, "pull in, those things rock!". We have some neighbors that ended up getting their furniture off these trucks and the prices they paid for the quality of the goods had been quite impressive, but we'd never come across the caravan.

In this case, there was a model she liked enough to buy that was in line with the other pieces we'd looked at in the past, but it was only going for $1,400. It was $1,400 with a provision though. No credit cards. As I've relayed in the past, I actually rely on the cash back reward credit cards for everyday spending as much as possible and then pay off the bills in full monthly in order to capture over $1,000 tax free in cash back rebate incentives each year (full strategy listed in the "Top Posts" section). However, in this case, no credit cards were allowed. After some nifty haggling, I got them down to $1,200 with a promise of a $50 cash tip (no shame in "bribing" the sales guy for $50 to save another $150) to help move some other furniture around once they got there (it's pretty funny, after the sale, they actually just drove the whole truck right to our house and moved it in). The piece was delivered and it's in perfect shape - all wood, no veneer, lights in the cabinet, looks great, etc. and in the end, thousands less than we would have paid retail.

What's the moral here?
The moral is that based on our interactions, the majority of Americans don't have a few thousand dollars sitting in a savings or checking account (or cash for that matter) and live month to month. Often, this is out of necessity, as one income or even two don't take an American family nearly as far as it used to. Sometimes, it's simply due to behavioral matters and personal finance habits. In our case, I'm the sole provider at the moment, and we keep about 2 months salary in liquid cash at all times. I have a full portfolio in a traditional taxable trading account that could be liquidated within a week as well (it's hedged too, so there is really no BAD time to sell, I just like to avoid selling on an unplanned basis for optimizing tax trades, etc.). With these reserves, I was able to easily react to an unforeseen opportunity and ultimately save thousands of dollars off an item I intended on purchasing anyway.

Some people might argue that cash in savings and checking accounts yields low interest rates, etc. The counter to this argument is that any portfolio should be diversified and you could simply consider this percentage of your portfolio (in most cases holding 10 or 15 grand close the vest isn't a major portion of your overall net worth once you've been in the work force several years with 401K, IRA, etc.) as the low-risk portion, which might be equivalent to say, a money market or bond fund in the low risk portion if you were being advised by a financial planner for full portfolio management. Heck, these days, there are savings accounts yielding double the rate of inflation and as much or more than treasuries! Personally, I use ING Direct, which is notorious for its high yields - 4.3% as we speak. Here's the link:


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