Monday, January 21, 2008

Word o’ the Day: Cash (ABC’s of Financial Planning)

“Cash for the merchandise, cash for the button hooks.
Cash for the cotton goods, cash for the hard goods.
Cash for the fancy goods, cash for the noggins and the piggins and the firkins.
Cash for the hogshead, cask and demijohn. Cash for the crackers and the pickles and the flypaper.
Look whatayatalk, whatayatalk, whatayatalk, whatayatalk, whatayatalk?”
- “Rock Island” (“The Music Man”)

We’re talkin’ ‘bout cash! When the stock market is in a correction, i.e., the world is falling apart, CASH IS KING. You can always exchange a dollar of cash for a dollar of goods or services. Try exchanging a dollar of any other asset for a dollar of goods or services and you have to deal with that pesky question: “What is your asset worth?” And then you (the seller) start up a dance with the merchant (the buyer). Ever trade in a car? Then you know exactly “whatayatalk”. There are no arguments about cash. The merchant will smile and make your change.

But what exactly is “cash”? Cash is any asset that can be easily converted into spendable dollars without prior contemplation of the asset’s worth on the part of either party to the transaction. The worth of the asset to be converted is understood.

Common types of cash: savings accounts, checking accounts, U.S. Treasury Bills (at maturity), FDIC-insured CDs (at maturity), money market accounts, money market funds, Guaranteed Investment Contracts (GICs – a popular funding choice in retirement plans) and “mattress funds”. Anything else purporting to be cash or “near-cash” or “just like cash” is something else – “not cash”. Of course, the value of these cash instruments depends on orderly and efficient markets. If things get really bad, then “mattress funds” are about the only cash one will have.

Questions? kimm@sweetwaterinv.com

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