Why Keeping Over THIS AMOUNT In Cash Is a Huge Mistake

Hey there, real quick, before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience Live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Most financial advice out there, they tell you, save as much as you can. The bigger the bank balance, the safer you will feel. Okay, but here's the crazy part. Sitting on too much cash is one of the riskiest moves you can make. Yeah, you heard me. The very thing that you think is protecting you is actually putting you in financial future quicksand. Okay? That's what it is. Because here's the deal. Cash isn't a wealth builder. It's a protector. And when you confuse the two, you don't just lose growth, you lose choice. And I've seen this play out for decades. First in my career as a CPA and now as a mentor, helping people just like you build their money machines. The folks who thrive aren't the ones with the fattest checking accounts. They're the ones who know how much is enough, how to make the rest work for them. So in this episode, I'm literally going to give you the exact formula to figure out your cash, your cash needs, and show you how to set up your emergency fund, your peace of mind fund the proper way, and explain what to do once you cross the too much line. This is building your money machine, where we help you master your money, eliminate financial stress so you can live a life of choice. Because earning more doesn't make you free. A money machine does. And that freedom doesn't start with the next paycheck, the next client, or the next pay raise. It starts the moment we get your money to work harder for you than you did for it. And I'm Mel Abraham, your host. And after 30 plus years as a CPA, an entrepreneur and an advisor, I've seen it where people hoard the cash and they don't build the wealth that they need and end up not having the freedom they should. So let's jump in. All right, I'll see you in the episode.

All right, let's talk about something that I think a lot of people get wrong, and that is this. Most people think is if I just pile enough cash in the bank, I'll be safe. Frankly, that's what my parents did is that they put money into CDs and the bank account and everything, but it didn't grow. And they thought that it was the safe thing to do. Which it may have been in perception, but not in reality. Because the bank isn't keeping you safe, it's keeping you stuck. So let's kind of break this down. But a lot of people will say, but I don't even know how to figure out my monthly essentials, let alone how to figure out what my cash needs are. Well, I got you, all right? That's exactly why I have the lifestyle cost calculator. It's totally free. It makes it painless for you, so you can go to melabraham.com lifestyle download. You'll put all your information in your expenses, it'll project out and you'll get a chance to see what your vision for your life is going to cost. So you can then start building the machine to make it happen. But let's, let's talk about cash now, okay? Because the first thing you need to know is cash is safety, not strategy. Cash isn't meant to build wealth. And it's not the engine to your money machine. It's more like the seatbelt. It keeps you safe in a crash, but it's not driving you anywhere. Okay? So, so you sit back and say, well, then why keep cash at all? Well, there's four reasons I think that we need to have cash in there. First, it's a cushion for crisis. If something happens. A job loss, a medical bill, the car decides to quit on you on the freeway. It allows you to not go into the ditch or go into debt, if you will, when things don't go your way, when life actually happens. And so, so it's a cushion to keep you protected and to keep the assets in the machine you're building protected. The second reason that we need cash is for what I call sinking funds. This is the short term stuff that you know is coming up that you don't want to go into debt for. So for instance, when we did our home remodel, we put cash away and we had a sinking fund for it so we could pay cash for, for the remodel, which did a couple things. One, it allowed me to negotiate better with them. But two, I didn't have some big bill when it was all said and done. Okay? So short term stuff like vacations, weddings, new tires, home repairs, remodels and the dreaded word taxes. Put that away. Okay? So that needs to be in cash in a way that it's safe, it's not exposed to the market. So it's not going to go up and down. And now you know that you have it available to you when you need it. The third reason that we need to have some cash is peace of mind. Okay? So you can sleep at night without waking up at 3am stressing out about money, you know, having, having some margin, some buffer in there is going to give you peace of mind. It's going to allow you to have less stress when you know it's there. Okay? And then the fourth reason is for opportunities. Because when economy cycle, when markets tank, when the person with the cash isn't panicking, they're buying. When we bought this house, we put a substantial amount down, 50 over 50% down. Well, that allowed me to negotiate a lot better deal than other people would have and to take the house off the market and get it, get a good deal on it. So, so you want to have cash available when opportunities arise to make that happen. Now you're going to separate it because cash for sinking funds, cash for opportunities, and cash for your preservation, your peace of mind are totally different. They shouldn't be co mingled, they should be separate in the sense of making sure that they're there when you need it. Okay? You don't count the money twice or three times and say, well, I could use it for that. Use it for that or use it for that. No, it gets one use. And it's either going to be for your peace of mind or emergencies, or it's going to be for the sinking fund or it's going to be for opportunities. Put it away that way. All right, so that talks about the first thing up that really leads us into this idea of the emergency fund. This is your survival safety net, okay? And the rule of thumb on this is three to six months, and I tend to agree with that. Now, that's three to six months of essential expenses. That is your needs, your survival. So it's not Netflix, it's not your Amazon Prime. We're talking about rent, we're talking about mortgage, we're talking about utilities, groceries, insurance, your medical, your transportation, your debt, minimum payments. It's that it's the essential stuff that you need to get by on a regular basis. Now we say three to six months is the emergency fund. So if you have those things adding up to say $4,000, then somewhere between 12 and $24,000 you want to put away now, where should it live? It should live in a High Yield Savings Account. Right now, in the US the best savings accounts are paying just north of 4%. Now. They're going to go up and down because.

They'Re variable interest rates. So if the Fed starts to drop rates, we can see that these things will, will drop. And, and that might mean that maybe we don't put it in a High Yield Savings Account, maybe we do something else with it. We'll talk about that a little bit later in this, in this session. But, but it's not, you know, the returns aren't amazing, but we want to keep it safe, we want to keep it liquid, we want to keep it away from fees, and we want to make sure it's 100% insured because this is, this is our safety net and it needs to be there when we need it. Okay, so, so that's. The first stage is three to six months. Now, if you've read my book or you know anything about me, I actually want to push a little further than that. Three to six months is an emergency fund. The Peace of Mind fund, as we look at it, is actually nine to 18 months. I want to push further. And once we have the three to six in place, we can slowly push that nine to 18 months. Here's why I say this, and I have been saying this for years and years. When things happen, I actually think it takes much longer than three to six months to get yourself on your feet. And it can take a short time to just destroy us financially. And so having a little more cushion is important. Now, that also is dependent on your age, stage and circumstances. If you're a single individual with no real house payment and no one depending on your income, you might just push to like nine months. But if you have a family and you're the sole breadwinner of the family and you have a mortgage, you might want to push to 12 or 13 or 14 months because so much is riding on it. If something, God forbid, happens to you as a wage earner now, if you have, say you're married and you have a second income, then maybe, just maybe, you're still at the nine months. So these are just guidelines. They're kind of bumpers for you to work through. But it is something that's going to allow you to start to put yourself in a place where you have peace of mind, the ability to sleep, and know that you got nine months, you got 12 months. And the reality is I actually have more than that in my situation because I'm 64.

I don't have a huge Runway. Hopefully I do have have a lot of years left. But the bottom line is that I don't want a lot of volatility in my portfolio and I need the liquidity just in case we want to slow down, stop, do anything. And so I've extended it a little bit in my situation. Okay, so this is where we start to look at things and say, well, how much cash is actually too much? And I think there's a formula we can use. And so here's how I see the formula. If we're looking at an emergency fund, like I said, it's three to six months of the essentials. Okay. If we're looking to a peace of mind fund, it's nine to 18 months of the essentials if you need it. And then you have the sinking funds, which are your short term needs. These are the needs that you know you're going to do. It's the remodel you might have to do, the repair, the new car that you might, might be thinking of buying, the wedding, the vacation, the family reunion, those kinds of things. And so the formula really starts to come into just deciding first off, if you have nothing, I want you to start with the emergency fund. So you're going to say, so it's my three to six months plus the sinking fund needs. So if, if we look at it this way and we say I have $4,000 a month in essentials and let's just use three months for now, that means I need $12,000 just for the three months emergency fund. But I know that I want to do a vacation for $3,000. So I got $12,000 in the emergency fund and I got $3,000 in a sinking fund for the vacation. So what I really want to get to is $15,000 in those two accounts. So the formula, I think is a very deliberate specific calculation and everything, because anything beyond that, if I calculate and all I need is really $15,000 between the two and everything. Now I would also add into this formula, potentially especially if you're self employed, is to make sure that you have part of the sinking fund away set aside for four taxes. But anything beyond that, it's lazy cash. That's when money stops protecting you and starts holding you back. If all of a sudden I need $15,000 in cash based on the formula and I have $25,000 in there, well then I'm wasting that cash. It should be working for me because remember, it's about Getting your money to work harder for you than you did for it. And it won't do it in a savings account. Won't do it in a high yield savings account. Okay? So if you're sitting on 200,000 savings account, but your essentials are 4,000amonth, that's years of expenses just collecting dust while inflation just eats it away like a little Pac Man. Okay? So we gotta get it working for us instead of taking a nap. And the last time I checked, naps don't build well. So that leads me to this, this idea of how should you hold the cash? Should it just be in a high yield savings account? Here's what I don't want you to do. You don't put it into some major bank that's only going to pay you 0.2%. Okay, I get it. But I have none of my, none of my cash and none of my banking goes through major banks. I hate to say it, and I'm not with Chase, B of A, Wells Fargo, any of those. Most of my stuff is with credit unions or proper online banks. That's it. Okay? Because I like one, the community feel to the low cost structure. In fact, there are no fees, the ability to have a relationship with them. And I'm not getting gouged. And I get better returns, I get better returns on their savings or their high yield savings account. So what I would do is look at where I can get the best high yield savings account as one of the avenues. Now that means that what I would look at is I would look@bankrate.com do a search, see what the best high yield savings accounts are. There's three cat, three classifications or three characteristics if you will, that I think they need, they need to have one. They must be 100% liquid. In other words, you're not tying it down for three months, six months or a year to get a return. It is liquid. I can get it, I can get it at any time within 24, 48 hours. The second characteristic is that you're not going to pay any fees on it, y'. All. They're making money on having your money in their account in their bank. So you shouldn't be paying for them to use your money to make money so there's no fees. And third, it is 100% insured, meaning that there's, there's some sort of insurance on it if, if the bank goes under like FDIC, which is limited to 250,000 right now, but there's ways that that goes up and you need to check that. But you want to make sure that it has those three characteristics. You want to look at that, go through bankrate.com, do a search and everything. And then beware of this. Some of those banks on there will have teaser rates where they'll say we'll give you 6%, but in the fine print it's 6% for 30 days or it's 6% on the first 5,000. Okay. And then it drops. So I don't play that game. Just give me a rate that is consistent and I don't have to bounce it around or play that game. Okay. So that's one way to handle it. The other possible way to handle it and we do a combination. I've got some in a high yield savings account and I have some in this strategy and that is what I call a ladder strategy. Okay. Now this, you actually do lock up your money for a short period of time. But once you the ladders in place, there's a window that will make sense. You'll see how this plays out. Let's say instead of dumping $50,000 into a single account, you start to split it and you're buying CDs or Treasury bills by doing that. So you'll take say $10,000 in a 30 day CD or treasury bill, then another 10,000 in a three month and another 10,000 in a six month and another 10,000 in 12 months. So you see how you're laddering the maturity of them. And so every few months one of them will mature. And that means that at worst case, you have to wait a couple months to get to the money. And then once one matures, if you don't need the money, then you roll it into another 12 months so it goes to the back. So it's just kind of like playing leapfrog as, as you go through it. Now why this works is by locking things down a little bit but still giving you some liquidity through the laddering process, you can get higher yields with it. So some CDs are paying five plus percent right now as as of the recording of this two, you still preserve your liquidity within 30 to 60 days away.

The, the third thing is that it gives you, you still have the safety FDIC insurance on CDs. If you're doing treasuries, it's backed by the US government. And then the fourth thing is that it's building discipline. I mean, let's be real, it's harder to blow money that's sitting in a CD versus cash that's staring at you in the checking account. And you know that if you pull that, that money out of the CD or that treasury early, you may get penalized. Okay? So there are a lot of ways to do that. Now having done that, what are the traps, what are the things that can, can happen if you end up with too much cash and why too much cash is, is too dangerous? Is dangerous. So I think the, the biggest thing out of everything and this is probably the biggest risk to your whole wealth. As much as people think it's, it's other things. This is the one thing that every time I run my money machine master plans with my clients or even on my own stuff, the biggest impact on my wealth and, and the portfolio and everything is inflation erosion. Okay? The $50,000 today loses literally $15,000 in buying power in 10 years at a 3% rate of inflation. So if inflation starts to level up a bit, then what happens is that your ability to take that money and use it, buy it just buys less. And so having. That's why we don't have too much cash in there. We use the formula, we come up with it and we allow that to sit in there. And everything else was invested in assets that outpace inflation. Things like equities, ETFs, index funds, real estate, those kinds of things that historically outpace inflation. And that's how your wealth builds, is you outpace inflation. And remember, this piece is simply for short term needs and safety. So it's not to build the wealth. Everything else is to build wealth. This is to protect the wealth. And so we don't want excess in there because this is going to erode away. The second thing that can happen is frankly, lifestyle creep, big balances, they whisper. It's like the little devil on your shoulder. Go ahead, you deserve it. Buy it. It's here. You got the cash. Why not? Now suddenly all of a sudden that emergency fund is buying you new sneakers. Okay, we gotta be careful about that because it burns all that if you're going to have it. This is one of the other reasons that I like to have the emergency fund and all those funds in a different bank altogether. So it's out of sight, out of mind. Okay? The third thing that can happen is insurance caps. Remember I said FDIC only covers up to $250,000 per deposit or per bank. Beyond that, you end up having risk. So you may have to go to multiple banks if you have more than that. Or some of the online banks, they've created networks so they, because their Network of banks. Each bank is contributing a $250,000 coverage. So you can end up with, you know, a million dollars worth of insured coverage. But watch the fine print. Make sure, remember, this is your safety stuff. So it needs to be safe. That means that I don't want to put it at risk by exceeding any insurance caps. And then the fourth trap is that you lose, compounding. Your lazy dollars are literally sitting back sipping lattes while the investing hours are working overtime. And so it's not compounding. Even if it's paying 4 or 5%, 3 and a half to 5%, whatever it is, it's not compounding a ton. Okay? And the fifth thing that you got to be really careful about, especially in today's world, okay, is that big balances are at risk of scam exposure. Okay? If, if that gets out, you might, you know, things like that, you become a bigger target. So just be aware. So those are the five traps that I see with having too much cash in there. So, but if you start to understand this now, you start to formulate a plan and a formula on how to have the cash. Now here's the rule of thumb. If you need, if you need it in under five years, keep it safe, okay? If it's longer than that, put it to work, okay? So cash for short term protection, investments for long term freedom, that's the game you're going to play. And if you're not sure about what that number is, start with my lifestyle cost calculator. Again, it's totally free. Go to melabraham.com forward/lifestyle. Because if you don't know what your, your numbers are, you can't calculate. 3 months, 6 months, 12 months, 18 months, success. You don't know what the real monthly number is. And that tool will, will help you. And we've got the links in the, in the description also. So the other thing, and the last thing that, that I think we want to mention a bit is that one more role for the cash is this idea of opportunity. See, in 2008, people without cash, they panicked. People with cash, they bought the assets and they doubled and tripled. And the liquidity isn't just for survival. It's your backstage pass to wealth. I know that a lot of my wealth just rocketed from that 2008 period on because I had the liquidity, because I had the cash to take advantage of the declined asset values. And so a lot of times people freak out when the stock market's going down and everything go, oh, my gosh, oh my gosh. But think about it. That means that, that the Googles and the Apples and, and, and the, the Microsoft's of the world are going on sale. All I know is that when Nordstrom's is having a sale, you're not. We don't run away from it. Well, we run into it. Same thing here. That to have some cash set aside for possible opportunities to buy in should the market cycle down. And it does. It's just a matter of when and how deep. And then you can take advantage of it and be able to build from there. So here's your game plan. Calculate, number one, calculate your essentials, okay? Figure it out. If you need help, grab the lifestyle cost calculator. Number two, build your emergency fund. Three to six months. Decide where you want it, what High Yield savings Account. You want it in where it is. Open that account, link the accounts, get it set on automatic. Number three, decide if you need a peace of mind fund. Once you have that three to six months, are you going to push to nine to 18 months somewhere in there? Okay. Number four, create the sinking funds. Make a list of the short term expenses, five years or less that you need, that you think you need in your life. And maybe you either have an account that has different buckets in it or you have separate accounts for it and you set all of this up and the funding of it on automatic. Okay? And then number five, if it applies for larger amounts and bigger cushions, you can apply a ladder strategy. Okay? And then number six, take everything else and start investing it. Because cash is there to keep you safe, but investing will make you free. Okay? So. So this is the game plan for you. This is how I want you to run with it, and this is how you make sure that you're not keeping more cash than you should in, in the banks and losing wealth in the process. Okay? Remember, cash keeps you safe. Investments make you free. Cash is your seatbelt. It's there to protect you, it's not to drive your life forward. That's the job of your money machine. All right? So go ahead, grab the lifestyle cost calculator. It's in the description. At the same time, do me a favor, hit subscribe. Stay with me on this journey and let me know if you have questions. Let me know if you have thoughts. I'd love to hear from you. I'd love to have the conversation with you. Because remember this, I believe that financial freedom is your birthright. And I'm here to light the path for you to get it. All right? I hope that you found this valuable and in just let me know and on the process to building your machine, I hope I get a chance to see you on the path to your financial freedom. And until I do, always, always strive to live a life. See you next one.

Thank you for listening to the Affluent Entrepreneurship with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the Affluent Entrepreneur Facebook group now by going to melabraham.com group and I'll see you there.

And that's it for this episode of Building your Money Machine where we help you learn how to master your money, eliminate financial stress and live live a life of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple, Apple Podcasts or wherever you're listening to this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can continue to get this information and this message out to people. Because I truly believe that financial freedom is your birthright and I want to help each and every one of you claim it. Thanks so much.