Feeling Cash Rich

 

“It’s your money, you paid for it.” – George W. Bush

I read a great article last week that discussed some of the psychological effects of having ample cash on hand (i.e. liquid, in the bank down the street) and felt like I needed to share it as it has come up quite a bit lately.

A lot of people, myself included, are being affected by the low interest rates that banks are paying. It seems especially low when your perspective includes the high interest rate periods of the early 1980’s. For those of us in our 20’s or 30’s, it’s not that we’re not affected, it’s just that it kind of is what it is. In our view, it’s a savings account and we know that its purpose is, not to earn much, but not lose any value and to be available when those emergencies come up (no, the pending iPhone 8 is not an emergency!).

Although the CFP® in me thinks that if the bank is paying you less than 1% in interest and inflation is greater than 1%, you’re technically paying the bank to have your cash in a savings account – yes, your account is losing real money, albeit a small amount, but still.

The article included above by Michael Kitces and numerous conversations with clients and prospects (as recent as late last week), have made me come to the realization that the ‘feeling’ of security that comes with having ‘enough’ money in the bank, in most situations, tends to outweigh the potential to earn more of a return on that money. It just feels good to look at that bank statement and see those crooked numbers looking at you regardless of how small that interest rate is.

Just so we’re clear, it is completely OK to have ‘enough’ in the bank to ensure you sleep well at night and look forward to receiving your bank statements. That’s totally cool.

However, you also need to keep in mind how much will be needed to accomplish your financial goals. Taking advantage of compound interest and returns is a must for long-term savings goals such as a child’s education or retirement.

Trying to strike this balance between available cash vs. invested cash is a good reason for engaging in a relationship with a CERTIFIED FINANCIAL PLANNER™. This is our job – we run scenario after scenario and show you the results so you feel comfortable with the plan you choose to run with.

Most people think that this is only applicable for those who are approaching retirement. Pre-retirees are certainly not the only beneficiaries for these discussions. Combine some education and knowledge with the amazing tools that are at our disposal and you should get some pretty good ideas of how to approach this topic.

Ryan

 

 

Nerd’s Eye View: https://www.kitces.com/blog/buying-happiness-life-satisfaction-wellbeing-with-cash-on-hand-reserves-ruberton-gladstone-lyubomirsky/