16 Mar Cash is KING but too much may be TAXING

Build the cash up, invest the cash and wait, build it up again and invest the cash and wait.  If you are investing outside of the traditional retirement buckets, then I don’t really know of a way you can invest your “home run” dollars in any form of dollar cost averaging and thus you build this mountain of cash while waiting to get it invested.  Money should just be math, but it is still emotional even when you are in a good spot financially and have a strong savings rate, at least it is for me anyway. The emotion rides high as I build up the pile of cash, and emotion rides high when I’m making the decision to invest the pile of cash also in-between those highs is a very real low or medium low of “I should just fill my 401k and take the 7%”.  Allow me to take you on a little journey of my roller coaster of a mind.

First, I could eliminate a lot of this rollercoaster mindset by doing the dollar cost averaging with my home run money, but that would mean I’m maxing out both of our 401ks. While this may be the right strategy for many, I just believe there is too much money left on the table seeking a larger return.  I love my 401k and currently have about 11% of my income going into it plus 4% more from the match and my wife has 5% going in plus either a 3 or 4% match from her employer beginning shortly when her entry probationary period at work ends.  My 401k is invested mostly in a Vanguard Target Date Retirement fund which self-rebalances for me and thus takes essentially no effort on my part to manage, however during the pandemic I changed all future contributions to go directly to a total stock market index fund to buy up as much stock as I could while it was on sale.  Overall my 401k is going to achieve the Stock Market average of 7-8% which is good with me.  If I’m going to invest my home run money, I’m seeking a return of significance above and beyond the 7-8% above, not to mention the tax break I could get if I chose the pre-tax option (I have a mix of both Roth and Traditional 401k).  Typically in the single family home rental space I’m seeking a return of 9-15% solely on my cash in, against the annual cash flow.  On top of that minimum 9% I receive mortgage pay down by my tenants which builds my equity in the home which eventually will be able to be sold for a gain or draw a HELOC on and use that cash to further invest.  Finally in the real estate world I have the appreciation side which is risky to bank on, but nice to have in your back pocket.  For example, I purchased my first home for $187,000 which was worth about $205,000 at the time and it just appraised 3 years later for $235,000!  On this particular home I get about a 10-12% cash on cash return, Mortgage Paydown on a 3.12% investment loan increasing equity, and finally a $30,000 net worth increase that I was able to leverage into a $26,500 HELOC that I can use for purchases.

There’s one option, I can build my cash for 6-9 months to have a pile for a down payment on a rental home and well exceed the 7-8% I’d achieve in my 401k, not to mention it is hard to access and have to leave my employer, complete a rollover and eventual ROTH Conversion Ladder to make it accessible 5 years from now.  With Rental Homes I have access to its gains (monthly cash flow), equity via HELOC, or I could sell it when the lease expires and do something else with the cash down payment and overall appreciation gains.  I like the options, and I like the higher returns overall, thus I build the cash and wait.

In my head during the cash build I watch it earn 1.1-1.75% in an Ally Online Bank account and die inside a little bit looking at the $40-$80 a month in interest it earns.  I’m encouraged knowing its eventually going to earn me $300-$450 a month when I buy the next house with it, but that cost of waiting feels like forever.  Earlier on I mentioned that I wouldn’t skip the 401k option for a nominally higher return, the reason for that is the cost of waiting and sitting on too much cash can be taxing on your returns.

Add on top that my current cash build we are working on and have built is likely going to sit for much longer, we decided we wanted to think bigger and buy a semi-passive investment that takes more work than a house, but returns much larger rewards, a laundromat.  However, to buy the type of laundromat we’re seeking, we’re going to need a down payment in the ballpark of $70,000 to $135,000 depending on the sellers of whatever suitable Laundromat we find having a willingness to finance some of it themselves.  While I know the cash on cash return on the laundry is incredibly high, the cost of waiting is taxing as my money isn’t at work. I can’t stick in in a brokerage account and buy stocks with it, because the next big drop could happen and now I’ve made my down payment situation worse, sure it could go up, but this is a short term savings strategy of 6 months to 1 ½ years worth of saving, so its sits in the ally account and earns nominal interest.

Remember the marshmallow study from my post “It always comes back to Laundromats”?  Here we are again, this concept of waiting out potential gains now for potentially larger gains later.  In the end its worth it, and I’ve found a new way even through this writing this post to come to terms with the cost of waiting.  If I never find a laundromat for sale (I think I will) the worst case scenario is I’m sitting on a large pile of cash ready to deploy and I’ll have options.  I could run down the smaller market I have a rental home in and could buy somewhere between 4-6 homes that would cash flow between $200-350 each.  I could look for a small multi family deal in a college town or metro area and have a down payment and achieve similar returns in a more convenient and likely to appreciate marketplace.  I could buy a different business that isn’t semi passive or passive at all and begin to consider quitting my job or use the money for a partial down payment and money to pay a GM to run it for me the first year.  None of these are bad scenarios, and all of them theoretically well exceed the return I’d get in my 401k options.  Again, there is nothing wrong with piling as much as you can in your 401k whether you go the tax advantaged route or not, heck Jim Collins wrote a book about how simple and easy it is and spells it out in an incredibly easy way “The Simple Path To Wealth”.  Great book, great read, it put me on my final path to firing my financial planner and going to 100% index funds.  Its just a tad slow for me and I know I can speed it up with higher returns.

To wrap this thing up and bring my emotional rollercoaster to a close, this post talked about how cash is king but too much of it can be taxing.  If we let our cash sit on the sidelines and never do anything with it due to analysis paralysis, fear, or whatever holds us back, at some point we have missed out on opportunity for gain.  Not to mention if you cross calendar years you can’t fill a 401k any longer and now that opportunity is lost (this is a potential strategy for me by the way, if I have enough cash or more than I need for a purchase I may just put 100% of my last few paychecks in to max out my 401k and not lose the option).  Like many things in this world, there is a balance and while cash truly is king, we also need to make it go to work for us as soon as it is fitting for our investment style to avoid it sitting on the side, doing nothing, and having created a self-imposed tax on ourselves and growth.