Warren Buffett’s recent annual letter to shareholders stated, “In managing, I will make expensive mistakes … But I will never risk getting caught short of cash.”

I interpret Buffett’s statement that his firm, Berkshire Hathaway needs to have cash so that it can make good investments. Or, it needs cash, so it’s not forced to sell an investment when Buffett doesn’t want to.

I see many investors maintain an inadequate amount of cash. Many don’t keep enough cash because unencumbered, safely-kept cash doesn’t return much interest. Therefore, brokers and financial advisors persuade them to invest cash into the stock market. Most advisors are incentivized to do this because they earn more money when their clients are invested in the stock market.

This is often bad advice. Look at the many reasons you should try to maintain at least $50,000 in cash. You need cash…

  1. To pay for unexpected emergencies such as medical expenses.
  2. To invest when you find a good opportunity to purchase land, an investment property, a small business, or a stock.
  3. To make a down payment on a home or another large purchase.
  4. To sleep well at night.

The key is not to, as Buffett puts it, get caught short of cash because when you’re short, you might have to sell an asset at a low price or pay high capital gains to get cash. Remember, cash is king.