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Thread: Strictly Cash Savings Only-Dumb?

  1. #1
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    Strictly Cash Savings Only-Dumb?

    So, dh and I have a friend. He lives in a different province but we see him once a year or so. He's married and has twin girls (about 10). His wife is a SAHM. He works freelance in a precarious business that is growing weaker by the year. He expects to be totally out and looking for other employment in the next year or so.

    He was good at what he did and knows he will absolutely not make that kind of income again-probably half the amount. His wife could go back to work, but it would be a low paying job that has to fit around her daughters' school schedule

    So..in the old days he would always push us to buy mutual funds and to pad our RRSP (Cdn retirement account). He was a big believer in mutual funds and sunk a lot of his $$ into them.

    The past 5 or so he has changed. He says all the big corporations are top heavy. All the 'big wigs' earn million dollar wages yet the business ends up tanking (there are a few Cdn corps that have suffered greatly in the last decade or so-and shareholders watch their thousands being turned into pennies)

    So...he now keeps all his savings in regular savings accounts. He claims they get as much interest as locked-in GICs (not sure what the American equivalent is).

    I think he said he is earning either 1.5 or 2 or 2.4% on his investments. Here's the kicker (for me) he has almost $150,000 in savings account. Other friends tell him to buy a condo-or a big down payment-with the money and rent it out. Others tell him to invest in stocks, mutual funds.

    But he is adamant about leaving it in a savings acct. He says he knows the family income will drop by at least 50% in the coming years and rather than stress about investments he wants to know the $$ is in there to tie them over or for emergencies-home repairs, new car, schooling for girls, etc.

    His home is also paid for and he has no debt. He lives in Saskatchewan which is booming now so his home value has shot up

    To me, he has a lot of money. But I'm not sure what he is doing is unwise. I know people always say 'you can make money or you can make your money make money' and obviously he is doing the former. Also, not sure what inflation is but he is either hovering at that or possibly below

    Thoughts?

  2. #2
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    Quote Originally Posted by Mighty Frugal View Post
    The past 5 or so he has changed. He says all the big corporations are top heavy. All the 'big wigs' earn million dollar wages yet the business ends up tanking (there are a few Cdn corps that have suffered greatly in the last decade or so-and shareholders watch their thousands being turned into pennies)
    I don't know, I wouldn't take that on faith. But my feeling is if you are looking for corruption in the stock market, you will find it.

    I think he said he is earning either 1.5 or 2 or 2.4% on his investments. Here's the kicker (for me) he has almost $150,000 in savings account.
    Ok if that's canadian dollars a conversion calculator tells me that's worth about $147,000 USD, so pretty interchangable.

    Other friends tell him to buy a condo-or a big down payment-with the money and rent it out. Others tell him to invest in stocks, mutual funds

    But he is adamant about leaving it in a savings acct. He says he knows the family income will drop by at least 50% in the coming years and rather than stress about investments he wants to know the $$ is in there to tie them over or for emergencies-home repairs, new car, schooling for girls, etc.

    His home is also paid for and he has no debt. He lives in Saskatchewan which is booming now so his home value has shot up
    Which is precisely why he SHOULD NOT buy a condo now probably, aren't they having a housing bubble there? Peak of a bubble is not the time to buy ... Of course if you can make income on rents from the purchase price and anticipate rents being stable it might be ok to buy. But if it's a true bubbly boom rents may not be stable at that amount and may fall...

    Basically I think his thinking is rock solid and sound. $150,000 CAD or USD is not that much money, how many years living expenses is it for him and family, I dont' know of course, I'm assuming it's probably a cushion of a few years. I don't see anything wrong with having that kind of cushion in cash, especially if the unemployment situation is tenative like his is. Now if he had 2 million dollars would I say it should ALL be in cash, probably not, but that is a very different situation. Is cash absolutely secure, of course not, it's eroded with inflation, vulnerable to currency issues (though the CAD is sound I think) etc. etc. But over the stock market or a bubbly real estate market when your own income is insecure, makes all the sense in the world to me.

    I know people always say 'you can make money or you can make your money make money and obviously he is doing the former.
    It seems to me those who can make their money make money (at this point, in THIS zero interest rate economy) are either putting a lot of WORK into it (junkman says he puts 20 hours a week into researching investments - so it is a part-time job but I believe he is retired from regular work) or else they have enough money to hire briliant investment advisors (if you are middle class um sorry, but this isn't you, and if your grand nest egg is 150k um it's not you! This is the realm of the wealthy). No free lunch for the average person afterall.
    Trees don't grow on money

  3. #3
    Senior Member awakenedsoul's Avatar
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    It sounds like he knows what he's doing. He's planning ahead. Suze Orman says that in these times "cash is king." I have stayed very cash heavy the past few years. I focus on caring for and keeping what I have. A lot of people here are losing their homes when one spouse gets laid off. They don't have cash. They can't even afford groceries. (Yet they have fancy houses, brand new cars, every gadget in the book...) It's really sad. They were so used to really high incomes and lots of shopping. I used to be "house poor." It sounds like he has a lot of money to you, but for a family of four, with both parents not working, it's not that much. It's a cushion, but it's not a retirement.

    I've also put more time and energy into having plenty of food. My orchard and vegetable gardens are really producing now. I'm so glad I listened to my intuition during 9/11. My gut instinct was, "Start growing your own food, you're going to need it." We're in a really different world now.

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    Mighty - I am also a non-investor and have my savings in cash at the bank. I have never invested and never plan to. My money - both principal and interest - is protected by the US Govt and I sleep at night knowing that. This was especially important to me when I decided to quit my job and knew I would be living on a relatively smallish fixed income from a government pension. So while, like your friend, I had a paid off house and some money coming in, I felt much more secure having that extra in the bank to use if needed. I'd rather earn less interest but have more security. I think this is especially true in your friends case when he has a tenuous job situation and a family to care for. He probably has more than enough to suppliment a smaller income so that his wife can continue to stay at home with the kids. To me that is a much better quality of life then having them both work and his money tied up in some kind of investment at this time. He can work towards a retirement income sometime in the future when his situation is better

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    Senior Member Rogar's Avatar
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    I really don't see any problem with your friends investment strategy. Especially with his uncertainty of future income. It is not exactly what I would do, but we are all different in our ability to take on risk. 1.5% is better than loosing money, like so many have done with real estate and stocks over the last several years. I heard an old phrase years ago that I've not forgotten: risk and return will always be intrinsically related.

    I think if I were in your friend's shoes I would probably take maybe 20% OR 30% of his savings and invest in indexed mutual funds, but I'm not in his shoes and that is just where my comfort level of risk might be. I have friends who have put a slightly larger down payment on rentals and it provides them with a positive cash flow and some extra income. I've never worked the numbers for something like this, as I'd just as soon not deal with the hassles that go along with being a landlord.

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    Holding 100% cash leaves you vulnerable to opportunity costs. Beating 2% or 2.5% shouldn't be difficult. Low-risk bonds might even do the trick. Also, the worry about businesses failing because they're top heavy seems exaggerated. Buying index funds helps mitigate the risk. A few top heavy businesses included in the fund may individually produce negative returns, but it doesn't follow that your investment will tank as a result, since the fund will include many other companies, as well.

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    Being a good little Chris Martenson follower, I am keeping as much money away from the markets as possible (and it's not easy, with the intricacies of Big Finance these days). I personally hold the belief that the market is going to self-destruct within a couple of years in a way that will make the 2008 crash look like a minor pothole -- so I don't see anything wrong with your friend's strategy. In some peoples' scenarios, it may even be too risky. I'm not a doomer, more of a "doomer lite," but I am concentrating on things much more tangible than bonds and index funds, which can become worthless pieces of paper overnight. So 150K in savings? Safer than 150K in the market, as long as his bank remains afloat and open.

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    thank you all for you comments (keep 'em coming!) I kinda always sided with him but I am risk adverse. But now I'll know what to tell people when they talk about it

    In Canada the Bank of Canada guarantees bank accounts for up to $100k. So providing he has divided their savings between the two of them they will be ok

    puglogic-I am intrigued about your forecast-can you shed some more light? I'd love to start a garden but we live right in the city and our back yard is the size of a postage stamp AND I don't trust the earth-but maybe a few container gardens would help. I always figure if push does come to shove AND we get a bit of warning we will head to my parents-they have a huge veggie garden, chickens, rabbits, and so many other things that would see us through.

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    Mighty Frugal, you shouldn't take anything I say as wisdom, because there are many on this forum that are FAR wiser than I'll ever be, especially when it comes to finance. My personal beliefs are just based on a combination of observation (of Europe, our own debt crisis, the ungodly hugeness of the derivatives market, and other terrifying messes), a sense of running out of time/delay tactics/recourse, and just gut instinct that repercussions from the U.S. election - no matter which way it goes - will usher in even more chaos than we've already seen. I am hoping I'm all wrong, but preparing just in case. It helps me to sleep better at night.

    There are tons of alternatives to growing a garden - lots of other ways to develop resilience. For example, in Toronto they have a great movement toward rooftop gardening - love that. Googling the various topics and checking out other discussion boards will unearth a ton of ideas that will work in your situation. Just limit your exposure to the super-doomers if you can....those folks give me nightmares. Here, we're building community, getting smart about food & water security, eliminating all debt, investing in useful skills/tools of all kinds, and staying positive and healthy. And staying out of the stock market It's all kind of fun, really. And I've made some new good friends.

    Whatever happens, I believe that Simple Living folks will always make it through. Some smart, resourceful, resilient people here on these boards.

  10. #10
    Senior Member Kestra's Avatar
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    Do you know if he's making full use of TFSAs? Between the two of them he should have $40,000 in non-taxed accounts. That would help with the low rates. For that kind of money and that situation I think cash is perfectly fine. Those rates are just beating the recent national inflation rate so that's good. And the SK real estate market is pretty crazy right now. I would definitely not buy an investment property at this time in SK.

    Does he want to have any money in MB instead? I just Googled a random Regina credit union and saw that their 5 year GICs are at 2%. In MB credit unions are at 3% for a 5 year. Don't know if he wants to lock anything in for that long, but a GIC ladder with some of the money might not be a bad idea. We also have a couple credit unions paying 2% on savings accounts. I was told you only have to be Canadian to be a member, not necessarily to live in that province. I use ING Direct to transfer money between banks without having to go to any branches.

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