Ep # 46: Is Holding Too Much Cash A Missed Opportunity?

Benjamin Haas |
  • What does "is cash still king" mean? - 2:17
  • The role and amount needed for your cash reserve - 3:33
  • How would we define holding too much cash - 7:01
  • Our three bucket theory - 8:19
  • Role of cash to help with your short-term goals - 12:42

Spoiler alert - cash is still king, just don't hold too much!



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Full Transcript:

Benjamin Haas  00:02

Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!


Adam Werner  00:38

Hey Ben, how you doing?


Benjamin Haas  00:43

I'm doing very well today. Adam, how are you?


Adam Werner  00:45

I'm fantastic. For those of you listening at home, we're laughing because we tried to record this one time already and we said this intro is so redundant. It's the same thing over and over again and here we are. We hit the in a second time and it was almost identical.


Benjamin Haas  01:02

Lovely, lovely weather we're having today. Right? I like your white shirt.


Adam Werner  01:06

Insert day of the month here.


Benjamin Haas  01:09

Happy August pal. Yeah.


Adam Werner  01:12

Well, in the spirit of what may feel redundant. Our topic today is a conversation that I feel is evergreen that never goes out of style. It will just be a commerce. Yeah, it's my word of the month calendar again.


Benjamin Haas  01:31

Wait way to segue really smoothly into what could be a boring topic. So yes, way to go.


Adam Werner  01:40

We were talking about this topic a couple of weeks ago, right, we have our list of things we want to touch on and, in your words, it is cash still King? And coincidentally enough


Benjamin Haas  01:52

Or Queen


Adam Werner  01:54

Is cash still queen. But coincidentally enough, CNBC just happened to post an article yesterday which was essentially the exact same idea from a handful of financial advisors and they were kind of sharing their feedback. We read through it and it's like, this pretty much matches exactly with how we would talk about it so like that was a sign. Let's record this one.


Benjamin Haas  02:17

Yeah, so per usual, let's give some context to what do we mean by that. In case it's not a familiar phrase, financial planning 101, one of the most fundamental pieces of advice we have to give is you need to have some sort of cash reserve, some sort of cushion before you would start investing money. But there's also the opposite side of that which would be people that maybe are really comfortable being as an investor, we'd say very conservative, maybe there's some risk aversion there. Maybe it's due to uncertainty where maybe they're holding a lot of cash. So I guess the theme for today should be to talk about what is the right amount? Are we feeling differently about it right now in this environment where the market's been very good? Interest rates are next to zero so does this change kind of that old adage that cash is king? I'll let you kick it off if you wish.


Adam Werner  03:17

So the short answer is no. It shouldn't change and we'll


Benjamin Haas  03:25

Or its cash not King.


Adam Werner  03:28

No, we already established cash queen.


Benjamin Haas  03:32

It is in my house.


Adam Werner  03:33

Yeah, definitely. So yeah, the different market environments, whether interest rates are at zero or not, fundamentally from a financial planning perspective and you touched on this, right? It's the cash component, we'll kind of talk about the role that we see that play. In our world, the role of the cash reserve or just having that cushion, its role is to be that safety net, not to grow. So that number one needs to be just resubmit, maybe just resetting that expectation on what you should or what someone should want to see out of their cash and that truly is the emergency or opportunity reserve and not necessarily something that should be invested. I'll throw it to you and see what you think.


Benjamin Haas  04:27

I was just going to say, then let's define that. For certain people that I think are in that asset accumulation phase of their life, they're working towards some longer-term goals, probably aren't retired yet. I don't know. The bare bones minimum, three months of your expenses. We'd probably more be more comfortable with six months if you're a one income household, maybe you have variable compensation, you're not just straight salary. You know, maybe you push those things when you get into retirement and maybe I can throw this back to you. We almost like to see it be a little bit more. Maybe it's 12 months and I want to say of your expenses that maybe it's what you need to pull from your savings. You need to have at least a year of that and we would say that because of market turbulence that can come in time.


Adam Werner  05:16

So there are two distinct ways of looking at this and it really is segmented by just stage of life. While someone is still working, has an income, that three to six months of expenses, I think is, again, our standard. But when you get to retirement, that same three to six months doesn't necessarily apply theoretically in retirement. If you're over the age of 62, you probably have social security income at some point. Maybe there's pension income, so instead of just looking at it from a pure here are my expenses, let's hold that much cash. What is that gap? And I think you've said that between my expenses and the fixed income that I know, if I do nothing different, I'm going to have this amount coming in. It's that gap that we would use as that one-year number. So if that gap is $5,000, multiply by 12, then you need $60,000 in cash that we would say is a minimum floor.


Benjamin Haas  06:17

I'm glad you said a minimum if people are a little bit more comfortable holding more cash. They don't see that as opportunity lost but they see that as a comfort zone. Sure, you can stretch that and I think the whole point for us as using that as at least a baseline is it does hopefully give yourself permission to withstand market volatility because you're not spending from assets that are at risk. You're spending from a cash reserve. Hopefully there's interest, dividends, gains that may be flowing back through. We call it our three-bucket theory but I think it was really important to say that's a minimum. But then there also needs to be like a maximum because at some point, it is opportunity lost.


Adam Werner  07:01

So how would you define holding too much cash?


Benjamin Haas  07:07

Great question. I think it's a byproduct right now of the inflationary environment and maybe how that check is recreated. So let's just start with inflation. If you're not making anything on cash and inflation is picking up, meaning the cost of goods and services that you consume are certainly going up over time. Then too much cash means you're just safely losing money. I guess the other way to look at it and I'll ask you to add some color here. You were talking about recreating that paycheck in retirement, maybe it's Social Security, maybe it's pension. Great. Those things historically do not have cost of living adjustments that will go up with your health care expenses, that will go up with your utility bills so if you do not have some sort of investable assets or savings that is keeping up with those expenses and you're really just relying on those fixed paychecks, then again, over time, you're not going to be able to keep up with inflationary pressure.


Adam Werner  08:06

Yeah, so you touched on the three-bucket theory and essentially what I guess, do we have time to break this down as quickly as possible.


Benjamin Haas  08:17

Do it.


Adam Werner  08:19

So yes, that first bucket is the cash bucket. This is what led us to this conversation, right? How much cash should we hold and it's that one to two years, again, depending on preference. So that you know if I need to pay bills, I'm not having to sell from anything that I own from an investment standpoint. I have it in cash, it's liquid, it's there, it's not going to fluctuate. We would say that in that middle bucket is anywhere from three to seven years of whatever that need is, that gap from your expenses and fixed income, in a very conservative investment, short position, bonds, things that are fixed. Maybe it's dividends paying stocks. They may fluctuate but you're at least getting paid to own them and then you set it right, that conveyor belt. Whatever that's kicking off, can go to help replenish the cash that you're spending. Then the third bucket is what we call like seven plus years in in horizon and that can be stocks. So that, yeah, over time, stocks have proven to be able to keep up with inflation and then some, so that if you know or if someone knows that they have essentially seven years' worth of their income need in retirement covered from either cash or very conservative investment standpoint. If the market goes down, March of 2020, COVID happens, the market is down 30%. We would hope that they don't feel stressed to have to liquidate their risky investments. They can let them recover because they have well more than enough cash to kind of see them through a volatile period.


Benjamin Haas  10:00

I think that goes back to why cash is still King. You said it well at the beginning. If it's not paying anything, it's not paying anything but that's not its first objective and I would say the timelines that you throw out there, we didn't make these things up. Oh, well, let's just pick some numbers three to seven years, you know, seven years plus, most market downturns historically, last 18 months from where they were at their peak to, you know, dropping to the bottom, we've seen those things happen much quicker in recent history but again, we're being conservative here. If you hold 12 to 18 months, maybe two years in that cash bucket, you set it well, the whole point is that you give yourself permission to wait things out and most market cycles, the full business cycle is three to seven years. Hence, let's keep three to seven years in that middle bucket. Three on the low end, maybe if you're a little more aggressive, if you're more conservative, seven years. But I think that comes back to the key point here. If people are holding too much cash because they're looking at that, as it's what I'm comfortable with, you probably are missing opportunities over time. I had another thought. And I think this comes down to individual situations yet again. We're saying a minimum if you're working, three to six months, and then in retirement, maybe 12 months. But I think we got to add to that. I think part of planning is recognizing what could be coming around the corner, what you do want coming around the corner, and if there is money that you're marketing to be spent, that's really got to be in addition to a cash reserve, right? 


Adam Werner  11:45

Yeah, that's a great, great, great point, then we've certainly had those conversations and I say it's more with younger clients, right? If they're saving for a specific goal, whether it's a new home purchase or even for our retired clients saving for a project around the house. Putting things through kids through college. Things. Putting things through college. I have three of those things at home that are coming up very quickly. But yeah, that's a great point. So it's not just the short-term cash reserve need that if I lose my job, I need to fill an income gap. But yeah, if there are projects that you know, you're going to spend this money, you would hate, same scenario, right, you would hate to have that money invested in the stock market, see the market drop, now it's time to fund this project and now, my $20,000 is now worth $15,000 and now feel like you're selling at a loss or you have to delay the project that you've had planned. 


Benjamin Haas  12:42

So let's give two more examples to this that I think would really tie our conversations together. It's not uncommon like you said, for somebody to come to us and say, here's what I want to do, I have this opportunity, I want to spend this money and if they don't have enough set aside where they would actually be cutting into that cash reserve, we probably say don't do it because you really don't want to put yourself in a spot where you don't have that cash reserve at all that you've liquidated everything. Home purchase would be a great example. You can't go to too far into the hole on that. You need to have cash. Cash is king in that situation. We say the same thing in retirement. If somebody doesn't have like a cash reserve and all of their wealth is in their retirement funds, that's kind of dangerous too because if you do have that emergency or opportunity, now do not only maybe need to go in investments but there may be taxable investments. I think there's absolutely multiple reasons that we say cash is still King. Having that cash reserve and then making sure you earmark whatever else you think you might be spending money on. You know you got projects around the house. You know, you want to take that vacation, whatever it is that money stays in cash too.


Adam Werner  13:45

Yep. Yeah. So now we're at the part of the podcast where we say everything we've just said. General advice but the answer for your specific situation is always it depends, right? Everything we've talked about there's so many different caveats here and there. It really is specific to an individual situation so if you have questions, reach out to us. That's why we're here. Let's walk through it together.


Benjamin Haas  14:12

Way to wrap it up.


Adam Werner  14:14

Okay, great.


Benjamin Haas  14:16

Yes, cash is still King and Queen. Just don't hold too much. Alright, have a good week.


Adam Werner  14:26

Thank you. Good job.


Benjamin Haas  14:35

Hey everyone, Adam, and I really appreciate you tuning in. Please note that the opinions we've voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening

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