Let's coin a new term: "Blind Savers." Blind Savers are people who sock money away in a savings account without intention - rather, they stockpile cash to the point it becomes counterproductive. You may be asking yourself, "how can it possibly be a bad thing to have a mountain of cash?" Of course, it's not a bad thing. It's a beautiful thing…to a point.
Far too often, we see people that have accumulated an extraordinary amount of cash. When we ask, "why?", the typical answer is that they were on autopilot. They were set up to automatically contribute to their savings account, and before they knew it, the amount of cash started to outweigh the amount in their investment portfolios. This is a common result when someone isn’t aware of their options (or they don’t have a financial professional to help optimize and monitor their investments – after all, most people don’t have the time to devote to their money management). Having too much cash is certainly a first world problem, but it presents a real opportunity cost. It's worth learning about your other options because productive money grows. Unproductive money stagnates.
First, let’s take a quick look at inflation: While cash sits in a saving account (earning virtually no interest), inflation is busy chipping away at the value of your money. The current low interest rate environment has made it incredibly difficult to eke out any growth in the safest savings vehicles. For example, money market savings accounts (aka high yield savings accounts) are barely paying 0.5% per year, while just a few years ago you could assume a 2.5% per year yield. Times are changing and we need to adjust with the times.
Inflation is on pace for rapid growth and showing signs that more is to come. Interest rates will likely grow along with inflation providing more opportunity in money market accounts down the road. But what do we do now to protect ourselves from the dollar value erosion? In the meantime, it’s worth considering other investment options.
The minimum goal for almost every investor should be to, at a minimum, keep up with inflation. Speak with your financial advisor (preferably a CERTIFIED FINANCIAL PLANNER™) to determine which investments are the most appropriate for you. They’ll help you determine if investments like short-duration bonds, tax-advantage bonds, conservative equity positions, etc. might be a good way to mitigate the impact of inflation on your portfolio.
If you're interested in learning a little more about inflation, our expectations for the future of inflation, and more, check out our previous blog post: https://www.pharoswealth.com/blog/a-little-inflation-research
Another reason you may want to reevaluate your blind-saver tendencies is because FDIC insurance won’t insure all your cash beyond a certain point. The rules can get complicated, but to give you a simple example: a single bank account can be insured up to $250,000. If you have more than that in your FDIC insured account, consider diversifying the account registrations to increase your FDIC coverage. In other words, if you have a savings account valued at $500,000 in your name, you can increase your FDIC insurance by transferring $250,000 into a trust account. Of course, this is just an example, and you should consider your situation carefully before making any changes. Check out the FDIC insurance website at https://www.fdic.gov/resources/deposit-insurance/ to get a little more information on the rules.
Blind saving is a very different concept than compulsive (or fear) saving. Compulsive/fear saving is a phenomenon that occurs when someone compromises their lifestyle – saving for the sake of saving - saving at an unreasonable pace. It’s not uncommon to see people live overly frugal lives even though there’s over a million dollars in the bank.
In most cases, fear saving is a sign of a disconnected relationship that someone has with their money. Of course, this isn’t always true – it could be that the savings rate has something to do with their goals and aspirations. In any case, it always boils down to making sure you have a good understanding for your goals and then thoughtfully creating a plan to work towards those goals. Get to the root of your relationship with money so you can aim to optimize your financial life.
Seeking guidance from a CERTIFIED FINANCIAL PLANNER™ that focuses on financial life planning is a great place to start. Work on identifying what’s important to you; your goals; create a savings plan to pursue those goals; routinely check in to ensure you’re on track to eventually work towards those goals. This simple, yet effective way of planning can help you get acquainted with your situation and on a better financial track.