Cash Is Queen
May 09, 2018
"I want to put my money where the bank puts their money."
As a financial planner you hear a variety of responses when asking about goals and objectives, but this was definitely a new one. At first, I thought the potential client I was speaking with wanted to put all of their money in the bank, but that wasn’t the case at all.
What they meant was: what type of assets are the bank buying with the money I am loaning to them?
When you put your cash in a money market account or certificate of deposit and receive 0% - 2% on that money, what do you think the bank does with it? Yes, there is a decent chance they roll in it like Scrooge McDuck for a little while, but after that I mean.
They loan it out to someone else at 6%.
You can see pretty clearly who is on the more profitable side of this transaction. But it gets worse, we now have to think about who is borrowing the money at 6% from the bank. Sure, there are some residential houses being financed, but the big dollars are being borrowed by big business.
Big business then takes the cash and invests back into big business, producing a return greater than 6% (on average at least, or else this system wouldn’t work). That means the value of the business grows, which in turn means anyone who owns stock in the company has benefited.
Now, the bank deal doesn’t look so great because there is someone even higher up the food chain. The owners of stocks are the big winners in the long run. As an investor with 95% of my assets invested in stocks, I appreciate the help you are giving me by keeping so much money in the bank. It is your cash that is fueling the growth in my retirement accounts.
I say that in jest, however. I want my clients to be the primary beneficiaries of a strong economy, and it’s hard to do that when you are carrying too much cash. This would be like running a marathon with ankles weights on. It might make for a neat picture, but your final time will suffer for it.
So what is the suggestion, move your cash (and security blanket) out of the bank and into shares of the latest tech startup? Of course not. The recommendation is to have an awareness of where your money is, and reevaluate whether or not that decision is right for you.
At the end of the day, there are only three things you can do with your money: hide it under the mattress (or in the bank), loan it to someone else, or own something with it. The farther you move to the right on this scale, the higher your return will be long-term.
If you do not know how your assets are allocated among these three buckets, let us know and we will be happy to break it down for you. Each bucket has it’s pros and cons, and you need to be comfortable with where your money is at, and how it is working for you.
If I can’t convince you to move your money out of the bank into better-returning investments, then there is only one thing left to say: thanks. My investment accounts appreciate the boost you are giving them by allowing such easy access to your money.
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