Cash Is Trash (#28)

Cash is trash? What does that mean? How is that so? Is your cash trash too? Host Josh Nelson explains how you can assess if you are holding any trash cash, and if you are, what steps you can take to help change that, and how quickly should you get that problem changed? 

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Transcript

Wiser Financial Advisor – Cash is Trash

Hi, Everyone. Welcome to the Wiser Financial Advisor with Josh Nelson, where we get real, we get honest, and we get clear about the financial world and your money. 

This is Josh Nelson, Certified Financial Planner and founder and CEO of Keystone Financial Services. We love feedback and we'd love it if you would pass it on to me directly at josh@keystonefinancial.com . Also, please stay plugged in with us and get updates on episodes and help us promote the podcast. You can subscribe to us at Apple podcasts, Google, Spotify, or your favorite podcast service. Let the financial fun begin!

I’m calling today’s episode Cash is Trash. 

One of the core principles and the purpose really of the Wiser Financial Advisor is this: it isn’t wisdom because of me necessarily, it's wisdom we're learning from other people and from each other. 

There are a lot of experts and people that have walked out there before us, in some cases thousands of years ago. Often the financial principles that we follow are not ones that have changed a whole lot. Many are kind of immutable laws that we need to be paying attention to rather than trying to go off and do our own thing. If we go off and do our own thing, that means we're trying to do it by trial and error. And of course, that will work eventually, but you know it could cost you a lot of money and it could cost you a lot of time. So, what we're trying to do here is acquire wisdom. The Book of Proverbs talks about how acquiring wisdom or seeking wisdom is actually the wisest thing we can do, and that's the point of the Wiser Financial Advisor.

Recently I got to participate in a virtual finance conference. There were a lot of great speakers, and one of them was Ray Dalio, who is the manager of Bridgewater Capital, which is the largest hedge fund in the world. It has the largest investment portfolio that's being managed out there. Ray Dalio is somebody to pay attention to. Firstly, because he's old—he's been doing this for decades and he has an investment track record that reportedly beats Warren Buffett in profits over time. 

Secondly, he is somebody who doesn't just pay attention to investments. He also pays a lot of attention to the economy and has a lot of good thoughts out there. Feel free to go out and follower Ray; I think that would be important for anybody who really wants to educate themselves on the markets and direction of the economy and so forth.

So, at this conference, one thing Ray said was that cash is trash.  He also said cash is trash about a year ago when I heard him speak. What Ray means by this, is that cash is trash to the extent that current interest rates are near zero, at least in the United States and in most developed countries in the world. In some countries, interest rates are even negative. So, the whole point of saying that cash is trash is to say that it’s bad if you leave your money in cash and it's not earning any interest and there's inflation. 

There almost always is inflation. There have been very few times historically that we've had any kind of prolonged deflation. Deflation means that our money is worth more by not spending it—in other words, if we hang on to it, it gets to be worth more and it can purchase more tomorrow. Inflation means just the opposite.

So, if we're hanging onto cash, that means that the dollars in our pockets are actually worth less over time, and right now it's important to think about this point. Right now, the consumer price index, our core CPI, which is what the government reports as far as inflation numbers, does not include a lot of stuff. It doesn't include gas. It doesn't include food. It doesn't include wood. Doesn't include housing, either, and these are all things that have gone up in price a little or a lot recently. Any of you who are spending money on any of those things, have no doubt noticed that those prices have gone up a lot more than reported inflation. This means that the dollars in our pockets, whether literal cash or money saved in the bank that’s earning close to zero—those dollars are worth less every day that we don’t spend them.

Is this by design? Well, yes, in a lot of ways it’s by design, because the government would love it if we went out and spent money. Consumer spending is about 70% of the economy, just you and I spending money on stuff. If we've got dollars we're hanging onto, and we know that they're worth less and less by not spending them or investing them, then we're probably going to go out and spend—which is what's happening. A lot of people are taking those dollars, going out and spending them. But that is also driving prices up further.

As far as Ray’s comment about cash being trash, let's think about a couple different principles: One of those is that cash is not trash when it comes to your emergency fund. I always recommend people a range, typically three to six months’ worth of living expenses that they should keep in cash at any given time. Now, why would you do that when cash is losing value? Because if you don't have cash when there's an emergency, you've got a real problem. Then you can't pay for the emergency or you've got to go out and borrow the money, which is even worse because now not only are your dollars worth less over time, but now you’re paying interest on those dollars to somebody else and paying that off over time. That could be a real problem, so we do want to keep three to six months’ worth of living expenses in cash. 

Maybe you'll trim back on saving cash if you have six months or more worth of living expenses.  You can do something with those dollars you’ve been allocating to save for emergencies. Now, what to do with those dollars? 

I would go to principle number two, which is to pay off your debt. There's no reason to keep money beyond an emergency fund in cash right now if you've got debt. Pay your stuff off. Even your mortgage. Really think about it. Even if you've got a 2 1/2 percent mortgage, some very low interest rate, you're still going backwards because your cash is earning nothing in the end. In fact, it's probably earning less than nothing because of inflation. Paying off debt right now could be a good conservative way to take money out of cash and do something with it. 

Number three principle: Let's say we've taken care of our debts, and we've also got enough cash for emergencies. Then cash probably really is trash, and that's really Ray's point—that taking money and investing it in something that has a chance of beating inflation is probably a good thing. But it's important to remember that when it comes to investing, sometimes we get tunnel vision and we get that because of our emotions. Sometimes fear and greed can take over. In the world of investing, fear sets in when stocks have gone down in price and things don't seem like they're going very well in a particular area or maybe even the overall economy. Think of the spring of 2020, for example. The stock market dropped over 30% in value. When you think about it, we were doing something we had never done before, shutting down the global economy. There was extreme fear that set in. On the opposite side of fear is greed, and greed really is about not wanting to miss out, right? It's that fear of missing out that sets in when prices have gone up a lot and people are making money in a particular area.  Think of Bitcoin or Tesla or something like that. So, it's important not to get sucked into those emotions. 

How do we do that? By working with a financial professional. In most cases, you want to work with a Registered Investment Advisor, a fiduciary, somebody who's on your side of the table. You're paying them to give you advice that's in your best interest.

Another thing to think about when it comes to deciding where to invest your money, is risk. Think about it in terms of an entire portfolio, not just a particular investment. Often, people look at individual investments, and they don't want to miss out. They go buy Tesla or Bitcoin or something like that, or if they own some investments that aren't doing very well, they want to sell those. But it's important to think in terms of a diversified portfolio, meaning that you've got your eggs in lots of different baskets.

Also think about asset allocation. Asset allocation is our jargon in the financial world for taking your money and putting it in different asset categories, not only putting our eggs in different baskets, but making sure that those areas are not going to be correlated exactly to each other. What I mean by that is this: a portfolio might be made up of, say, five different asset classes or more. Five makes sense in a lot of cases to make sure that we've got different areas covered. That could be things like various stocks and bonds. Non-U.S. stocks could be different currencies or could also be commodities such as gold. Things like that are completely different from each other in the sense that we're trying to build a portfolio. That way, things don't all move together and we get exposure to lots of different areas that could make money and lose money at different times. Having asset allocation can dramatically reduce your overall risk, because you've got those different areas covered. 

So when thinking about asset allocation and diversification as part of an overall plan for financial health, we're talking about goals. What are we trying to accomplish here? In most cases, we're trying to produce income. It could be income to pay for college. It could be income to pay for retirement. For somebody who is financially independent, it could be for cash flow to cover their income for the rest of their life.

At the end of the day, we're trying to produce cash in the future, income in the future. Building a portfolio that is designed around that is really important, and that's why we recommend you work with a financial professional, especially somebody who's a fiduciary and paid to give you advice that's in your best interest. That's their job—to give you objective advice that will help you stay out of that fear and greed cycle.

So, I would agree that cash is trash in the long term but remember to keep your money in savings for your emergencies or any upcoming expenses that you've got—keep three to six months’ worth of living expenses. And if you've got extra cash, pay off debt. There's no reason to keep debt right now, because any kind of debt is going to be charging you some kind of interest. And with you earning zero on your savings or checking right now, going after debt makes more sense than just holding it in cash. Once that’s handled, take that money and do something thoughtful with it. 

Overall, the government is encouraging us to spend by keeping interest rates so low, and by inflating the economy. This is pushing everybody to do stuff with their money and people are. Just make sure you're not keeping the excess cash because that cash truly is trash. I agree with Ray on that.

So I hope this was helpful today. Be thinking about ideas that relate to these different areas, and certainly pass this on to anybody else that would find it helpful.

This podcast is growing and we certainly appreciate that. I think we're growing because people want to learn. This is important stuff and it's also important because it's not just me. I’m using ideas from other professionals, other people that walked before me, people that have a lot of wisdom they can impart. We're going to learn from them.

If you like what we're doing, definitely write us a review and subscribe to us on either Spotify app or whatever your favorite podcast service is.

With that, I hope you have a wonderful week and God bless.

The opinions voiced in this episode of the Wiser Financial Advisor with host Josh Nelson are for general information only and not intended to provide specific advice or recommendations for any individual. Investment advisory services offered through Keystone Financial Services, an SEC Registered Investment Advisor.