If you got to this point, congrats! You are doing a great job moving along on your goal to building wealth, you have your budget, you are leveraging your tax advantaged accounts and are overall reducing your taxable income. What’s next? Now we can consider liquid savings.
Reason to Keep it Liquid
With the exception of your emergency fund there are not many good reasons to hang on to a lot of cash (with interest rates ranging from .01 to 1%) however, if you know you are going to have to purchase a new or used vehicle, a home, investment property, or anything else you may need to have a large amount of cash on hand.
Let’s Talk Saving - Purchasing a Car
In this example, let's assume you buy a used car for $15,000 at a 6% annual percentage yield, on a 5 year loan. By the time you pay this loan back, you will have paid $17,339 ($2,339 in interest)!
Now let’s look at the same rate and payback period but on a much newer vehicle valued at $45,000 (more than I have ever spent on a vehicle, but there are people who like cars far more than I do). At the end of the loan you will have paid $52,198 ($7,198 in interest, that is the majority of the cost of a used car)!
If you are going to purchase a 2-4 unit home for investment purposes, you need to have a 25% down payment. Depending on the financials of the home, you can make some amount of money each month on the property. I will dig much deeper into this concept in my side gig discussions but let’s use the following:
Home Value: $250,000
Down Payment: $62,500
Loan Amount: $188,000
Total Mortgage Payment (with interest and taxes): $1285
Rent: $1000 each
You could leverage this down payment (which is not much more than the new car purchase) to potentially MAKE a 41% return year over year on that down payment. Now of course, these are just simple figures, but it shows the power of investing that capital, and you cannot do it easily with the initial down payment.
I am just a regular guy who does far to much research on financial independence and early retirement (FI/RE). I look forward to sharing my journey with you all.