Today on The Money Puzzle Podcast talk about Cash. Cash is cash, but there are two types of cash. One type is cash that would be in your checking and savings account. And the other type is anything else, like cash that is earmarked for later. Okay. We will discuss what our opinions are when it comes to cash. Join us next week, we post new content every Wednesday!
Speaker 1 [00:00:00] All right. Welcome to the Money Puzzle. I am Brian Ramsey. That is correspondent. No kidding. That’s totally stressful. I’m never going to let him live and.
Speaker 2 [00:00:09] Never know what you’re going to at this point in time. I don’t know if you’re going to just point out this. We’re sitting here dumbfounded.
Speaker 1 [00:00:13] Oh, no, that’s just our. And those are two guys out there that are crazy. I wish we could get a camera and tell you it’s. We’ve been sitting here. I think we’re all giggly.
Speaker 2 [00:00:23] For little stuff right now. Yeah, it’s crazy taste or whatever that smell is.
Speaker 1 [00:00:27] Yeah, I don’t know what it is, but anyway, it’s. It’s a super strong smell and these guys want no mask on. Yeah. So it’s kind of great. Anyway. All right, so last week we talked about taxes, and so if you mess it up, so make sure you go back if you missed any. Yep. So go back to our website or what’s family planning partners. You can Google us or you can go to Google the money puzzle and you can find us on YouTube as well, or even find us on any of the podcast channels. Just Google the money puzzle or search the money puzzle. Our phone number in case you are listening. 502200 5 to 1 zero. If you got any questions about anything that we’re talking about, they want to come in and meet with a smile. Make sure you do that because we don’t charge you for that. So come and talk to us about anything you want. Now, last week we talked about taxes. This week is another relevant topic. We are in the middle of May of 2022 when we’re recording this. And if you’re have paid attention at all to the markets, the markets are a little sideways. Might be a nice way to put it. All right.
Speaker 3 [00:01:31] Sideways is being generous.
Speaker 1 [00:01:32] Yeah, a little sideways, actually. I think last week we touched the bear market, which is by definition is a 20% fall off from its all time highs. So the S&P at that, the NASDAQ, I think, has been in.
Speaker 2 [00:01:42] A very well that’s been.
Speaker 1 [00:01:43] There for a while. And so we get a lot of calls when all of a sudden CNBC and Fox Business starts blasting all over, you know, bear market and inflation fears and recession, you name it all. And we get lots of calls. But the one thing we get calls around is cash. What should I do with my cash? I’ve got cash or, you know, what should I do? So what we thought we’d do is kind of breakdown how we view cash. So first and foremost, why don’t you guys talk about there’s really two types of it. Cash is cash, but there’s two types of cash. There’s one cash that would be in your checking and savings account, how we view that. And then number two, anything else cash that is earmarked for later? We view that as sort of investment cash, if you will. Okay. So let’s talk about what’s sort of our opinion around cash. You tend to say checking statements. What do we do with that?
Speaker 3 [00:02:44] Well, I would generally say that’s that’s your emergency fund, right? In the old Dave Ramsey approach. That’s your six months worth of expenses or however many months of personal living expenses that you want to have in reserve just in case of emergency break, open glass in case of an emergency. So, you know, most people say six months, some people are comfortable with three other people feel more comfortable with with one year’s worth of expenses. But that’s your cash reserves. Those are your savings that should be sitting in a savings account, not really exposed to any risk, at least any market risk, so to speak. That’s when you need to get any kind of you know, you need to get new tires on the car. You need to replace the dishwasher, whatever it is. You have money set aside available at the drop of a dime if and when you need it. And that’s different from what you’re going to talk about. I’ll let you go into kind of our first bucket, if you will. Right. You know, investment cash.
Speaker 1 [00:03:37] Well, that’s real quick. Before we get there, let’s talk about checking. Your savings are quick because we get lots of questions around, well, how much should I keep in my checking out and what should I have in my savings account? There is a rule to 36 months, but here’s what I would tell you. Your checking account we would cut we really do to that is your operating account. That’s the account that you’re paying your bills in. Right. So that account is a personal preference on what you keep in there. I have people that come in here that all the time. They say, well, you know, typically what happens is, you know, you spin the account down throughout the month and then you get paid, whether it be Social Security or a pension or annuity payment or whatever income that you would normally get you from job. It sort of fills that bucket back up and then you spend down to the month and then it gets filled back up. So whatever that balance is is a personal preference of it. Folks that have come in, they keep 1500 dollars in there. That would drive me insane.
Speaker 2 [00:04:28] I’ve had people with five digits and it just it makes my skin crawl because it’s it’s dangerous.
Speaker 1 [00:04:34] Yeah. And you could also have someone that keeps hundreds of thousands of dollars in their checking account. It’s a personal preference. I really say it’s the same thing on the savings account side. Yes, it’s 3 to 6 months worth. That’s sort of the philosophy. But I also say it’s really whatever you feel comfortable. Yeah, sometimes it could be more than that. Sometimes it could be less than that. It’s whatever you feel comfortable once you have those two buckets for. And you’ve got a strategy in place every month. You’re complaining you’re filling up those buckets. Anything above and above and beyond that should go over to this case. It’s earmarked towards investments. That’s where we’re going to go. So just know there’s two separate types of cash. That piece of it. And now we’re going to talk more about cash that we want to earmark for.
Speaker 2 [00:05:19] Before we go all the way into that, let me add something to it, Eric, and that we’re actually having this conversation with somebody earlier today. One of the problems with keeping too much cash in a savings account, which I mean, that’s a that’s a viable thing, is keep in mind that your savings account is growing at maybe .5.6 if you’ve got a high yield account. And then compare that with inflation. It’s a guaranteed loss of value when inflation is higher than what your savings account is giving you. So keeping too much in there is actually arguably the highest risk investment that you have. So that’s where we caution people not to go too far with them. So start ahead and throw that one in.
Speaker 1 [00:05:58] No, that wasn’t on my list. Like five things.
Speaker 2 [00:06:00] Now. Okay.
Speaker 1 [00:06:02] Okay. All right. So let’s talk about short term cash. All right. Okay. So now we so we got the checking and savings accounts taken care of. Now we get cash that we know we’re going to use, let’s say, 5 to 10 years out. There’s the kind of bucket you get from 0 to 5. That’s one bucket that we talk about a lot and then from 5 to 10. So trying to talk about what the strategy is.
Speaker 2 [00:06:25] Okay. So what we’re talking about now is somebody who is already retired and they’re they’re taking an income stream from there or.
Speaker 1 [00:06:33] Nearing retirement.
Speaker 2 [00:06:34] Or nearing retirement. Right. So your earlier part of that where you can’t really afford to take investment risk because if the market does what it’s done so far this year, it could be catastrophic. If you’re highly invest in your bad to retire, just start. So you move into cash in those positions and your paycheck, if you will, that you’re paying yourself from your investments is coming from the cash inside of those accounts. And keep in mind, we talked about accounts last week. You know, you’ve got traditional IRAs for one case and Roth and all that. You can have cash in all of those. And you’re pulling from that based upon what’s the most tax efficient, but you’re pulling cash from it. You’re not constantly selling positions because that’s like trying to type in the market. And we know you’re never going to get that right. Do you want me to go into like the next bucket or you want to.
Speaker 1 [00:07:24] Keep it short, keep short term?
Speaker 2 [00:07:26] Okay. So just on the short term side, you keep all of that in cash or cash like investments because you just cannot stomach the investment risk because of the window when you’re going to be using it.
Speaker 3 [00:07:38] Yeah. And it’s important to further emphasize the distinction between someone in the accumulation and someone in retirement or the income phase of their of their of their life. Because if you’re in your accumulation stage, you’re still working, you’re still earning money from a job or self-employed income or whatever the case may be. So that’s where that emergency fund really comes into play, that we’ll just kind of stick with the six months worth of living expenses there. This is when you’re paying yourself. You need to have far more than that on hand, right? Because let’s say you need your income needs to be set really for the next couple of years out at least. And you really don’t want your income for the next couple of years to be exposed to market risk. Now, yes, it is exposed to purchasing power or inflation risk because the value of a dollar in a year is not going to be the same as the value of a dollar today. Sure. And that is obviously one level of risk. That’s why we don’t want to put too much into that.
Speaker 2 [00:08:36] That’s why you do a couple, maybe three years out, not five or ten.
Speaker 3 [00:08:40] Exactly. Exactly. So if you think about your income stage in divided up into different buckets, that short term bucket, that’s where you’re going to draw your income from for the next couple of years. That always needs to be filled up with with cash or cash equivalents. I think what you’re want to get into is kind of that second bucket where I need you to move on with this, talk about how to fill that one up.
Speaker 1 [00:09:03] Yes. So real quick, here’s here’s a if if we’re looking at very short term cash, we get this question a lot. Oh, I’ve got this money. Know, what should I do with it? Okay. What’s the purpose of it? Well, you know, it’s a normal buy a house in two years or I’ve got to buy a car and six months are going to buy a car in nine months. What what? Our philosophy is around cash that has a specific purpose for a specific time period. Less than two years should never have any market volatility at all, no market exposure whatsoever. To just be in your savings account, even if it’s 15 months out, it needs to be in a savings account. Zero risk. Yes. We understand it’s not going to get a whole lot. Yes. We also understand that it can have an impact from an inflation standpoint, but we don’t want that cash to go anywhere. Right. So if cash has a specific purpose for a specific time period, less than two years needs to stay cash in your savings account. So just make that clear now. Anything above and beyond that we can get into a little bit longer term here.
Speaker 2 [00:10:03] Okay. So if you want to go into that next time period, now you’re dealing with and once again, we’re in our retirement years, we’re providing an income for ourselves. That next bucket. You don’t want to expose that to full market volatility either, because, as Eric said, you’ve got a couple of maybe three years of cash on the sideline paying yourself. Now we’re talking about three, four, maybe five years out. How do you what do you do with that money? Well, you don’t want to leave it sitting in just a cash account because you’re exposed to too much inflation risk. Right now, that would be horrible. But you don’t want to go full market risk either. So now you go into more conservative investments. This is a good place and this can be a bad word, but this can, for some people, be a good place for a short term annuity where you get maybe a fixed rate of, say, 3%, three and a half percent. You know, you can count on that money being there for a certain period of time. This is where you get into you’re still dealing with cash equivalents, but instead of staying in cash for that, you can allow your money to grow. You just cannot place too much risk into it.
Speaker 3 [00:11:11] Yeah, we’re also looking at things like bonds, other fixed income types of vehicles. In regards to annuities specifically, there’s a whole host of pros and cons and there are so many different types of an annuity out there. So we certainly don’t want to say that suitable for everyone, especially for our compliance retirement as they’re listening to some people talk right now, for some people, they may be a suitable investment and something certainly we can talk about, but ultimately we’re taking far less risk than quote unquote market risk, investing in equities or stocks overlooking more bonds. We’re looking more and there’s all kinds of different bonds. And you can diversify a bond portfolio quite a bit, just like you can diversify a stock portfolio. But we’re looking at bonds, we’re looking at fixed income instruments along with maybe potentially some type of a short term annuity.
Speaker 2 [00:11:58] I think the main thing here is that, you know, all the different things that the two of us mentioned, we’re staying away from the equity side in the shorter term things because the risk is just too high. Sure. Yeah.
Speaker 1 [00:12:08] All right. So let’s say let’s say that we’ve got cash. Okay. And this came up in your old conversation. You know, they had a prospective client. They’d come in and had conversations at $100,000 sitting on the sidelines. And the conversation was, what’s the purpose of that money? What do you see tonight? What are you going to do with it? And I think there were some some for some part of it, they were maybe used to shortly. But the bulk of it was I don’t really ever plan on I don’t need it. I don’t plan on using it. It’s really for my kids for an inheritance. So when we’re talking about cash that we don’t miss it. Maybe it’s not maybe it’s not earmarked to kids. But but if let’s say you don’t have any necessarily need for it right now, so it’s really for much longer time. What now at that point, how would we do that?
Speaker 2 [00:13:00] Well, I mean, one philosophy and we had this discussion because in this case, we had pensions and Social Security that were greater than what we’re spending. So the cash on the sideline was actually growing. One philosophy is if you’re going to end up giving this away, who are you going to be giving it away? Is it your children? Is it your grandchildren? What’s the intent long term? Well, if they already had the money, how would they be investing it, since there’s no real risk if all of this went away instantly. You’re not losing any lifestyle. How would those people invest it if they had it now? So, you know, if you’re if you’re talking about somebody who’s an adult child in their forties, they are 15, maybe 20 years away from retirement years. How would somebody invest their money if they were 15, 20 years away from retirement? On the other hand, what if it’s a grandchild in their twenties? We actually had that discussion. Now you’re talking about somebody who if it’s if it’s not qualified money, they might be prepared to use it in the very short term because they want a down payment on a house or promising, you know, purchasing a car if they’re going to be using it for retirement. Now, you’re talking about somebody who’s possibly 40 plus years away from using that. It’s a totally different type of investment risk you would take. And that’s what people in that position, we would encourage them to think like that.
Speaker 3 [00:14:20] But I think what is significant in this case, the client we just spoke with here. The percentage of cast that she was sitting at relative to her entire portfolio was dramatically too high where we are outside of that very short term bucket. All of her income needs were already met by two pensions and Social Security. She wasn’t even draw. She wasn’t even paying herself from any of these investments. There was literally just cash sitting in her bank account that she was not planning on using any time soon, had no design or no plans for much less in the near term. So in that case, this is where we talked about inflation risk, purchasing power risk, because that becomes a greater threat to her overall to the overall success of her financial plan, being that that much cash in her portfolio is not going to be worth the same amount of money in a year, two years, three years down the road. So now you’re really inhibiting the amount of money that she’s able to leave, as, you know, as an estate to her to her kids and grandkids. And, you know, we start we start talking through that process and what that actually means. And then you come to find out, yes, you would actually like to make sure she leaves some money behind. And that was important to her. So that is something that’s important to her than the way her portfolio is currently constructed is not the optimal way to be able to achieve that goal.
Speaker 2 [00:15:39] And this kind of goes back to where I jumped the gun a few minutes ago. If you’re keeping it in these cash accounts and you’re never going to use the money you know, you’re losing versus inflation. So her big concern was she was afraid of losing money while she’s guaranteed to be losing value. Right. No. Whose fault is it this time?
Speaker 1 [00:16:01] The phone rang.
Speaker 2 [00:16:04] So in this case, it’s a guaranteed loss. If inflation is greater than the interest rate you’re getting because you’re losing by losing value. So the very thing that she was most concerned with, she was putting herself where there was no way to avoid.
Speaker 1 [00:16:21] Yeah. So here’s the other thing that I would just add to all this is I think a lot of this depends on what phase of life you’re in, whether you’re in the income phase of life or you’re in the accumulation phase of life. So generally speaking, we don’t know what you should do that cash until you come in and say, here’s my entire situation. You know what? What your recommendation. So if you find yourself in that position, you do have a lot of cash. You’re like, Oh my gosh, what should I do? Make sure that you’re, you know, come see us or make sure you reach out to a professional to actually go through the planning process and determine what you really should do with that money. But let me say this in the accumulation phase, what I’ve always told people that have longer time periods, you know, outside of setting your cash levels for your checking and savings accounts, which we talked about earlier, outside of that, that money should be put to work. So you need to be allocating that dollar, those dollars somewhere, whether it’s to a Roth IRA, an HSA, a nontaxable account, whatever it is, you need to put it to work because you don’t need it. My cash equivalent is my paycheck, but we get paid. What’s my that’s my that’s my cash outside of my what I keep in my checking account. So I think it’s different than if you’re in retirement and all of a sudden you’re in the distribution phase of life. Because now I’m not necessarily setting up my cash equivalents for retirement because I’m already there.
Speaker 2 [00:17:46] All right.
Speaker 1 [00:17:47] So now we have a lot of folks that come in that say, hey, I’ve got all this cash sitting here. What should I do with it? Okay, well, let’s. So you’re in retirement. You’re you’ve got the income that’s coming in. Let’s look at things like long term care. How are you ultimately going to pay for that? What are some of the things you can put in place today with that cash to help provide care for you as you age through life? So I think the peer the perception of what cash can do for you when you’re in the accumulation phase of life is much different than what it could do when you’re in the retirement phase of life. And so I just think it’s important that you reach out to a professional, come see us, because we are professionals. Believe it or not, we are. But if you come see us, we can sit down and determine what’s the best course of action for cash that you have. I can’t stress that enough. We have so many people that walk in the door that say, you know, we go through this just like this lady goes had. I mean, that’s just one example of, you know, hundreds of examples that we could that we could all give because folks are just sitting on too much cash. So, again, today was all about cash. It’s just what you should do with cash depends on your specific needs. And it so anyway, I just encourage you to go to go see professional. So with that being said, this is a podcast we do it is called the Money Puzzle. This is financially related. We also have another podcast we do called whatever something. I’m not sure what that something is called.
Speaker 2 [00:19:17] That used to be called. I still like the podcast.
Speaker 1 [00:19:19] Formerly formerly known as the Burgers and Bourbon.
Speaker 2 [00:19:22] Lectures. We’ll get.
Speaker 1 [00:19:23] That one. Yeah. So we, we review bourbon’s. We drop the burger thing several months ago anyway do bourbons. So make sure you tune in and catch us on that. And we also have a TV show that airs every Saturday morning at 1030 on our ABC affiliate here in Louisville. And if you don’t have time to catch that, make sure you go to our website or to YouTube. We post them every Saturday. I believe so. No, after the after it airs, we it’s automatically posted. So just make sure you check it out. We talked this exact same content with you here just a little bit more, maybe a little bit different spin on some of the topics, but otherwise, that’s it. So appreciate you guys watching. And I’ll let Eric Sonos off now.
Speaker 3 [00:20:03] Thanks for watching and thanks for listening. If you could leave a rating and or a review, that would be greatly appreciated on whatever podcast channel that you are enjoying our content. If you have any friends or family that you think would be interested in anything that we are speaking about, please feel free to share it with them as well. We greatly appreciate that and look forward to spending some more time with you here soon.
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