Strictly Cash Savings Only-Dumb?

[Mighty Frugal]

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?

[ApatheticNoMore]

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.

[awakenedsoul]

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.

[Spartana]

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

[Rogar]

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.

[Real Sustainable Habits]

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.

[puglogic]

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 (http://www.peakprosperity.com/page/what-should-i-do). 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.

[Mighty Frugal]

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.

[puglogic]

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 :D 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.

[Kestra]

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.

[try2bfrugal]

I am been thinking more along the lines of your friend lately, Mighty Frugal. I think the average person is being manipulated by the mutual fund industry. They have people sold on the idea that it is normal to lose 50% of your money in the stock market or in bond funds that never have a maturity date so you are never guaranteed to get your money back, even if they do not rise and fall as much as stocks. The mutual fund companies get their fees either way. From here on out my goal is to keep my money away from Wall Street. I am going back to the way my grandfather used to invest - CDs ladders, Treasury ladders, dividend paying stocks, plus TIPS and I bonds. If I can keep up with inflation I am fine with that. I will make my money from my business and simple living, and not gambling with investments that may go up or down 40 percent each year.

I think the updated equivalent to putting your money in Treasuries like first The Money or Your Life book, in the U.S. at least, is to put money in TIPS and I bonds since they are linked to inflation. I think in Canada they have something similar called real return bonds. Nominal and real interest rates are both pretty low right now but with ladders we would have some maturing each year and then buy at the prevailing rate, so we would end up with a rolling average for interest rates.

[iris lily]

This thread creeps me out. We've got more than $200,000 in cash and DH is resistant to moving out more, yet in my gut I think it's foolish to keep much in the market. We are diversified and certainly not all of our financial instruments are in the stock market, but still. ugh.

[Mighty Frugal]

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.

Hi Kestra-oh yeah, he's got the TFSAs (so do we) interesting about the MB 3%-is that the one that will let people from different provinces open? hmm..may be good for me!

Puglogic-this stuff fascinates me. I was watching 'doomsday preppers' for a while-wow-a little too much for me and the future they are planning for-I'd rather be dead on the street rather than live through that.

But personal economic crisis, or another great depression I would like to learn more about planning for that (just no zombies!)

[Kestra]

Hi Kestra-oh yeah, he's got the TFSAs (so do we) interesting about the MB 3%-is that the one that will let people from different provinces open? hmm..may be good for me!



When I started using that credit union and realized how much the credit union rates vary from province to province, I asked the investment lady if I moved, could I still do GICs with them? She said that was fine as long as I lived in Canada. As long as you have a way to get money into a chequing account there, they will start a GIC for you over the phone. That's what I use ING for, since you can link up to 3 accounts and move money around easily with no fees. Though right now I just walk down the street to the ATM. I'm not sure how you would start the account initially but I suspect you could mail in an application and talk to someone over the phone if needed. Between DH and I, we use 3 credit unions and they are all currently at 3 or 3.1%. They have consistently been around 1% higher than the major banks. I still have a couple GICs paying 4.9%. If you're interested, PM me, and I'll let you know which ones we use. Some may be more or less accommodating to out of province people - I really have no idea, since I haven't had to worry about that yet.

[flowerseverywhere]

the most important thing is to be able to put your head on the pillow every night and be comfortable with your own investment strategy. You have to understand inflation, what the risk is in every investment, and what accounts are insured for. If he is comfortable, then it is not for anyone else to say what he should do.
for every family the answer is different. pay off mortgage or have one? All in the bank or in mutual funds? untaxed or taxed accounts etc. What fees are associated with your investments? How easy can you get your money if you need it? Do you have an emergency fund? Do you have debts?

Very very complicated and individualized.

[Mighty Frugal]

sent you a pm Kestra-thanks

[awakenedsoul]

This thread creeps me out. We've got more than $200,000 in cash and DH is resistant to moving out more, yet in my gut I think it's foolish to keep much in the market. We are diversified and certainly not all of our financial instruments are in the stock market, but still. ugh.

Follow your gut, Iris Lily. I had bad feelings about the stock market before the crash, I told my dad, "I keep getting the phrase, 'market collapse' when I meditate." He told my mom later that I'd tried to warn him. He's very concerned about hyperinflation.

It's helped me to read books about the Great Depression and to study how the people who survived it lived. Thankfully I have no debt and I got out of my business when things started to tank. There are always solutions, if we are willing to change. My life is totally different now, but it's comfortable and inexpensive.

[ApatheticNoMore]

Puglogic-this stuff fascinates me. I was watching 'doomsday preppers' for a while-wow-a little too much for me and the future they are planning for-I'd rather be dead on the street rather than live through that.

I realize now I was pretty far gone when I was buying people kinetic flashlights for christmas (you know the ones you shake - at least they were were well made). Ok really not into the holiday gift giving anyway at all (!), and maybe never will be, but that is pretty far gone you have to admit ..... And this was long ago before the crash of 2008 even. Eventually, I gave up the doomer websites, because they were getting very bad for me psychologically. Move on with life, but still kind of very much into alternative economic preparations. What really ended that with a certain degree of sad finality was becoming unemployed. But this recession is the beginning of the end ... and in the future noone will have jobs ... and there won't be any way to get to them anyway as there won't be any fuel for our cars ... unless we can take public transport or maybe we'll all be biking ... and the currency won't be worth anything anyway .... and in the future practical skills will be worth much more than job skills and we'll need to trade them with each other and .... It all does you %#$# all good when you need to help yourself and find work (no my economic situation wasn't dire at all really, but clearly finding a job became a priority). The collapse was not here, just my own personal collapse.

Oh, I still believe in all that long term stuff (half the time I think most of my political outlook consists of: "think longer term people! *think* *long* *term*!"). And I care beyond just that. It's just the natural fall in priority when it's no longer about survivalism but just a surrender to prioritizing surviving in the world as it is now (few principles were harmed in this pursuit, but some illusions may have been).

[lhamo]

We also have a huge cash cushion, and have for close to a decade, since we sold our apartment in NYC. Originally we kept a lot in cash because we were planning to buy a place here in China. When interest rates were high it was pretty amazing how quickly it built up, especially as we were adding savings to it from our employment income at the same time. We hit the golden moment in 2009, when there was a mini-crash in the property market here and we were able to buy an amazing apartment. We timed it absolutely perfectly, hitting the bottom of that crash -- people at the bank were stunned at the price we got when we went in to do our mortgage. We did take out a mortgage while still having a substantial amount in cash reserves because we were not comfortable spending the cash reserves down to 0. We also would have had to cash in some long-term investments to avoid a mortgage. DH's job has always been a bit precarious, which is the main reason we keep so much in cash. Probably it is too much, but my goal is to build up to the amount we would need to pay off the mortgage, which is about 4 years of our current living expenses. We are currently at about 3 years of living expenses. That gives us TONS of flexibility should DH's job disappear -- we could take time to decide what our next steps would be without having to panic. We still have a lot invested as well, and are doing well with that. But I saw the value of our investments drop by about 50% during the market downturn, and that also makes me comfortable having a large cash cushion.

Our net worth is currently growing at about 7-8%/year. Having less in cash might push that up a bit, but I'm not willing to take the risk given our circumstance. And having the cash cushion also makes me less worried about what happens to the stuff in the market. I've seen it go up and down, and know that those funds are for the longer term, and we're not going to make any rash decisions about them.

lhamo

[junkman]

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?

Mighty,

$150k is not “a lot of money”. It’s barely an adequate emergency fund (given his employment and family circumstances). That $150k is his emergency fund.

His choice isn’t your choice, just as it isn’t the choice of anyone who has a track record of pulling more money out of markets on an after-taxes, after-inflation basis, than they bring to them. (I.e., better than 8%, year in, year out.) But that’s not his skill set. He's not a successful investor/trader. Therefore, he is doing what he knows how to do, which is to park money, so it will be there for when he and his family need it.

That's not dumb, not at all.

Charlie

[artist]

JMO but if he may be out of work for a while or having to live in a much smaller income, then having the cash as an emergency fund is a good idea. Once the dust settles and his job situation stablizes, then he can consider investing, Until then I'd actually suggest he keep the money available should he need to dip into it for something.