Urgency of Holding to Cash and Avoiding Buying Too Much Not Liquid Assets

Keeping cash on hand may not seem exciting in todays volatile financial environment but it is frequently the best course of action. Islam promotes restraint accountability and readiness—values that extend to our handling of money. Even though illiquid assets like private equity or real estate might yield larger returns they can also become liabilities in times of crisis. Conversely cash offers opportunity flexibility and security. Being liquid is not only sensible but also protective in Islam and financial wisdom.

Fundamental Ideas: The Importance of Cash

Cash is a strategic tool not just a neutral asset. Financial theory states that there are three primary reasons people keep cash on hand: speculative precautionary and transactional. The daily operational needs are connected to the transaction motive. The goal of precaution is to be prepared for unforeseen costs or crises. When others are compelled to sell, the contrasting motive enables people to take advantage of market opportunities. Acting with balance and foresight is known as hikmah in Islamic terminology. As the following verse illustrates the Quran frequently discusses getting ready for the future. According to Quran 59:18:

“And let every soul look to what it has put forth for tomorrow…” (Qur’an 59:18).

Beyond actions this call to accountability also encompasses financial responsibility. By anticipating future events and preventing harm Muslims can uphold this principle by maintaining liquid reserves.

Also read: Balance Between Worldly Life and Hereafter According to Prophet Muhammad ﷺ

The Illliquid Asset Trap

Investments that cannot be swiftly turned into cash without suffering a sizable loss are known as illiquid assets. They consist of private companies, collectibles that has no real market, middle class real estate and some long-term funds. Their true value is only realized when they can be sold which is frequently the issue even though they may produce impressive paper returns. It is difficult or impossible to sell illiquid assets at fair prices during market downturns. Investors have no choice but to hold onto their money or take steep discounts. This causes financial strain particularly in situations where liquidity is desperately needed. It is dangerous to have too many of these assets particularly when emergencies or life events call for quick access to cash.

Recent market shocks and the global financial crisis of 2008 have demonstrated how an excessive reliance on illiquid investments can swiftly transform portfolios from robust to vulnerable. A believer is never twice bitten from the same hole. Avoid placing yourself in a vulnerable position by taking lessons from previous collapses.

Also read: The Urgency of Owning Cash-Generating Assets According to Robert Kiyosaki

Cash as a Strategic Safety Net

Islam does not oppose investment or wealth. Nonetheless it places a strong emphasis on social responsibility, balance and risk awareness. Believers can respond to emergencies, help others and meet immediate needs when they have liquidity in form of cash. Liquidity is necessary for zakat for instance, people whose wealth is invested in illiquid assets might not be able to fulfill this duty when its due.

Additionally having cash enables believers to provide prompt assistance to others. Liquidity translates into action whether it is providing for unforeseen medical expenses aiding a family member or contributing to a charitable cause. Without it even the kindest of intentions may not come to pass or may be postponed. Cash allows for flexibility for investors from a strategic perspective. Those with cash can purchase assets at a discount when markets crash and prices drop while those with illiquid holdings must either watch or sell at a loss. Potential gains that are unavailable when needed are far less valuable than the options that come with having cash.

Also read: The Urgency of Emergency Fund Before Investing

Realistic Advice: Finding the Correct Balance

Determining a liquidity floor is the first step in good financial management. A portion of your assets should be set aside in cash or cash equivalents to cover at least a few months worth of expenses. In addition to helping to meet immediate obligations without stress or pressured sales this buffer guards against emergencies.

However its crucial to refrain from overcommitting to assets that are locked or difficult to sell. Investing too much of your wealth in illiquid assets can backfire when you need quick access to money even though they can contribute to long-term growth. An asset-rich but cash-poor situation should never occur with a well-diversified portfolio.

Having a well-defined exit strategy is also crucial prior to making any illiquid investments. Recognize when you can sell when liquidity is anticipated and whether there are any penalties. You might be stuck with investments that dont meet your needs or goals if you dont have this kind of vision. Regular portfolio reviews are essential to sum up. Both the financial markets and individual situations are subject to change. What was effective a year ago might not be so today. To keep your financial plan in line with your long-term growth and short-term security make it a habit to regularly assess your asset mix liquidity position and present needs.

Also read: Things to do at Market Correction to Protect Your Portfolio

In Conclusion

It’s not just smart to keep cash on hand and steer clear of illiquid assets, it’s also wise. Liquidity provides comfort, spiritual preparedness and the capacity to adapt to the ever-changing needs of life in an uncertain world. Muslims can responsibly accumulate wealth regularly assist others and remain safe by keeping cash on hand and illiquid assets under control.

Urgency of Holding to Cash and Avoiding Buying Too Much Not Liquid Assets

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