Dave Ramsey often repeats the popular phrase “Cash is king.” While I wont necessarily disagree with Dave, I’d be much more on-board if he said “Liquidity is King.” Two similar statements, but they mean a world of difference. Let’s look at an example…
Say Girl Ninja and I have been diligent little savers and we have $200,000 cash money sitting in our bank account. Then say we find a property that we want to buy valued at $180,000. Dave has always said he prefers people buy a house with cash (although he does tolerate 15 year fixed mortgages). Following Dave’s advice, you’d write a $180,000 check for the house and have $20,000 left in your bank account.
I don’t know about you, but there is no way in h-e-double-hockey-sticks I’d ever put 90% of my liquidity into an illiquid object like a house. That’s just as crazy as going to Vegas and putting $180,000 down on red. Don’t do it. EVER!
I will gladly pay a 4.25% fee (estimated mortgage interest) to keep the majority of my cash as, well, cash. It’s no different than when I had my student loan. At one point I had a $14,000 loan balance, but $16,000 in my savings account. I could have paid Sallie Mae off with the click of a few buttons. But I didn’t. What if I lost my job? What if my car was stolen? What if I had health issues? A paid off student loan isn’t going to put food on the table in the event I became unemployed. Money in the bank, however, allows me to pay my student loan payment, put gas in my car, food in my fridge, etc.
Instead of pay my loan in full, I mitigated my risk by paying bigger payments over a six month time frame. I’d throw a couple thousand at the loan each month, significantly reducing the balance, while still giving me time to replenish my savings. The peace of mind this strategy provided was well worth the $300ish dollars I paid in interest over those six months.
For this Ninja, liquidity is king. A house is only worth as much as someone is willing to pay for it (subjective), but a $100 dollar bill is worth one hundred dollars (objective). If you had $200,000 in the bank and you wanted to buy a $180,000 house, would you pay cash for it? Why or why not?