After distilling years of learning about finance on my own, I would like to make a post about a critical topic that I have benefited from immensely over the past years. This subject is extremely hard to explain because many of us are in different stages in our financial journey towards an earlier retirement or some level of financial independence. Nevertheless, I will be sharing my honest views on the difference between cash, savings, and capital. Hopefully, I will be able to help more people to realize these differences on their own so that they can achieve their financial goals sooner.
Cash – Money you can use
Yes, needless to say, cash is the most common form of money among the three. Without any level of exaggeration, most of us are cash-rich, meaning that we can afford most necessities and even some luxuries every now and then. Cash is the most misleading state of money because there are no differing factors between itself and the other two, which we will be discussing in the following paragraphs. However, if not allocated properly, treating money as cash will lead to a never-ending state of being strapped for cash. As a matter of fact, this happens to people in the higher income brackets as well as mention in the Straits Times a while back. This shows that the mistake of using all of our monies as cash does not only apply to people of lower social-economic status.
Savings – Money you need for emergency
“Savings” is the form of money that we are familiar with but is often seen as only important if we have enough cash to spend in the first place. While we can all go on an endless debate on how much savings is essential w.r.t our income, I feel that savings is more than just for emergencies but also for a certain level of security, furthermore, it is really not that hard to save a decent amount. To put things into perspective, everyone has wasted money on unimportant items in their lives for illegitimate reasons. If we would have saved up some percentage of it, then wouldn’t that add up to at least 5 figures over a span of 10-15 years? So, the point to note is that we should always see savings as a must so that we can possess some level of financial security as well as cultivate a habit to waste less money over time.
Capital – Money that must generate returns over time
This has to be the crux of the post because this blog is after all focused on investing. In short, Capital is not for using no matter what. Capital is akin to having a worker for deployment to yield returns over time. If you think about it, with a reasonable expected return of 5 to 10% a year, the amount of capital required is therefore really high for it to be significant. After mentioning this several times, I hope to emphasize to everyone that it is not easy to be an investor simply because you need to accumulate so much more capital than you imagine just to live a simple life without having to work. If you have not caught it yet, I strongly suggest that you check out this post as I have shared about this at length. Circling back to the topic at hand, capital is basically money that must stay at an almost “illiquid state” so that it can continue to yield returns. So if you have even imagined yourself with a CASH pile of $100,000. Make sure you have roughly 1 to 2 million dollars for you to stay at that state of wealth, otherwise, that $100k is no more than $10k cash, $60k savings, and $30k capital with an annual return of less than $3000 at a 10% return.
Closing Thoughts
I hope my sharing can help more people realize that the sexy part of having X amount of cash is nothing like what you see in the movies or in 2 min YouTube advertisements. Basically, money should not be all cash and the truth about having a certain level of wealth without having to work is often mistaken for living an awesome, luxurious life for the rest of your living days. That cannot be further from the truth unless you are already filthy rich.
