Do you have too much cash in the bank?
I recently had a conversation with a couple with $150,000 of cash in the bank and well-funded retirement accounts. I have been surprised lately by the high amount of cash families have sitting in their general checking and savings accounts. On the surface, this seems like a lot of cash. Do you think this couple is sitting on too much cash? What should they do with their hard-earned savings? Should they invest or pay down debts, maybe even make an expensive purchase?
So many questions!!
For those of you that know me or have had conversations with me, you know that I’m a questions guy 😊.
The answer to the big question, the article’s namesake, “Do you have too much cash in the bank?” is. . .it depends. The beauty of the financial work that I do with my clients is that I help them figure out what to do with their savings, and it greatly varies from client to client. Let me walk you through a brief example. . .
The first thing I help clients identify is how much of their money needs to be set aside for emergencies. The couple with $150,000 in the bank spends about $7,000 per month to live their great lives and are approaching retirement within the next couple of years.
So, we erred on the conservative side and set aside 6+ months of expenses in the emergency fund, for a total of $50,000. I recommended that they open a separate saving account to put these funds, so they are not mixed in with the general checking or savings account. We also evaluate their Elements Liquidity Score to see how their total cash savings benchmark against other families in their demographic.
Special Note: if you are considering buying or selling a home, pay very close attention to your down payment. Your liquidity (total cash) is precious, provides tremendous flexibility, and can take years to build up - be mindful of the impact a potential downpayment will have! It may be prudent to consider a smaller down payment to protect your liquidity and evaluate the impact on all of your Elements scores (image below). We will have a future more in-depth blog post on this topic.
Now, what do you do with the remaining $100,000 in the bank? Through getting to know this couple and their values—I helped them put pen to paper to come up with their dreams and goals—and that includes giving permission to spend!
We identified $10,000 to set aside for some awesome vacations, another $40,000 is needed for a new car purchase in the next year or two, $35,000 earmarked for kitchen and home upgrades, $5,000 for generosity and giving, and $10,000 for a checking account floating balance.
Notice one important thing—I did not recommend that they invest any of this money. On the surface, it looked like they should invest in the market because they have a large balance, but at the end of the day, all that cash had a home and a near-term goal, so we didn’t want to subject it to the volatility of the markets.
There you have it! That’s how you go about figuring out what to do with your cash savings. Again, this is going to be wildly different from person to person, and sitting down with a financial planner can help give you peace of mind, organization, and permission to spend!
If you’re interested in learning more about this approach and would like to connect, feel free to schedule a 20-minute introduction call to see if I can help.