Savings Account Rehab

{14 Comments}

“Savings Account Rehab” is a post by Adina J in which she confesses her secret addiction.

savings account

My name is Adina, and I used to have an addiction: my savings account.

OK, maybe “addicted” is the wrong term. Let’s try again. I am psychologically dependent on the concept of security as represented by the balance of my savings account. Doesn’t quite have the same ring, does it? Let’s go with “addicted” then.

I can blame my addiction, at least partially, on genetics or nurture. My grandmother was a level 1 hoarder. She amassed a variety of somewhat arbitrary household products (towels were a favourite) and cash in hidden caches around her house. Presumably this was to deal with her concern about possible future destitution. (I mean, you can never have too many towels. Or money in hand, preferably in foreign currencies, especially when the alternative is a communist country’s currency stored in a state-owned bank.) The fear of “rainy days” was instilled in me at an early age, and has never entirely left me. But instead of hoarding towels and cash around my house, I have a savings account.

I don’t want to horrify TiFi’s readers, particularly those who are more militant about building wealth, but at one time my savings account held more than half my entire net worth. More recently, it held around $40,000. Imagine that for a moment: $40,000 sitting there, accumulating 1%-or-so in interest, slowly losing its value to inflation. And, yet, there it sat until last year when I finally transferred about half of it into index funds in my TFSA. Part of the remainder got transferred into my husband’s TFSA a couple of months ago. Not counting money earmarked for our 2014 TFSA contributions and our 2013 mortgage pre-payment, we currently have a much less gawk-worthy 10% of our net worth sitting in cash. A higher percentage than many would recommend, but infinitely more reasonable than in the past.

Why hadn’t I done this before? Because I needed to go to savings account rehab first.

Many Canadians keep their meager savings in, well, savings accounts and GICs. Some of them do it because they don’t know any better. For many, it’s a decision rooted in a perverse form of risk aversion (as Garth Turner says, such cash hoarders fail to consider the risk of needing to eat cat food in retirement because they stuffed all their money in the Orange Guy’s shorts). For me, it went beyond that: a savings account represented security in the short term, a measure of protection against life’s unforeseen calamities. I was so attached to this idea of security that the thought of actually withdrawing money from my savings account made me feel (literally) queasy. So much so that, for a while, I opened a number of subsidiary “spending” accounts for things that I knew I had to save for and then actually, well, spend on (e.g. vacations, house repair, car maintenance, etc.). In doing so, I hoped to avoid violating the sanctity of my cash stockpile and the sinking feeling that accompanied any withdrawal.

But, eventually, it hit me: I was a hoarder. A money hoarder — one small step above stashing cash under my mattress.

Looking back, I realize now that failing to recognize my problem and deal with it sooner was the fundamental money mistake of my 20s, and the reason my net worth is not higher today. Don’t get me wrong; it’s hard to really screw up your finances when you’re an inveterate saver. But it’s easy to stagnate when you’re only playing defense. Sadly, even a mediocre net worth puts you ahead of most of your peers when you’re in your 20s and 30s, and so this mediocrity becomes comfortable. Don’t settle for merely above-average when the average is pathetic.

How did I break my savings account addiction?

First, I started paying attention to what reasonable PF-ers everywhere were saying. I learned to ignore my appalled reaction to the idea of ”eliminating” my large cash reserves. Hearing the message of “risk / return” repeated often enough helped to break down my long-standing indoctrination. At the same time, I started to take proper stock of our progress in net worth growth, and realized that we would have to become more strategic in our approach to reach our goals. Merely being good savers wasn’t going to take us to the goal-line (financial independence in advance of retirement). After setting my new cash management and investing strategies, I started taking incremental steps toward aligning reality with my plan: I moved small chunks of savings from cash to investments every so often. On each occasion, the sky didn’t fall. Eventually I whittled down the savings account to its current balance over the course of three years, all the while directing new savings into more productive investment vehicles. (A more recent turn-of-events has been the movement of my invested savings to lower-cost index funds.)

Others have said this better and more often than me, but here goes: there is no room for emotions in finance. With that goal in mind, the first step is to recognize the fact that emotions probably do play a role in your financial decisions — even the decisions that aren’t patently terrible. The second, and infinitely harder, step is to start taking active (rational) control over those finances.

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14 Comments… Share your views

  1. Having too much cash on hand is a nice problem.

    As a freelancer, I keep about $40K right now as a cash reserve so that I don’t have to sell anything to raise cash to pay for expenses, which is a little under 25% of my net worth, although I’ve maxed out my RRSP and TFSA.

    Well. That’s not entirely true. My TFSA is not maxed out because I am waiting for a bank to sort out their double-reporting bidness with the Canada Revenue Agency. I THINK I have $3500 in TFSA room but I don’t want to falsely over contribute and get ANOTHER letter mis-stating that I owe taxes for TFSA over contribution.

    Anyway, it’s also nice to have that kind of cash on hand when the markets tank for a day or two and you can funnel in some money to snap up stocks for cheap.

    • Absolutely – perhaps the best money problem around, LOL! I think that if my income was variable, my comfort threshold would be a lot higher too – definitely closer to 25% than 5% cash reserve. I don’t think the latter is a cast-in-stone number, depending on individual circumstances, but more of a useful guideline.

  2. I’ve been pleased to see that we’re recently getting close to having only 1% of our net worth in our cash buffer savings account (not counting a few other accounts for specific needs that are a few years away). It’s actually below my stated target because I’m a compulsive investor.

    If we need to come up with a lot of cash fast we could take it from our investment accounts pretty easily (or just borrow it at a low interest rate these days). They might be down at the time but I’m ok with a little extra risk since there is a good chance we will get much better returns this way.

    • Wow, that is pretty much as low as you can go! Not judging, just impressed with your general comfort level. I wish I could push myself that far … maybe in time. Although, as our net worth continues to grow (and the amount in our savings account stays the same), I will probably eventually get there :)

  3. That is a lot of money stashed away. I have been building my savings account, but that is only to build a down payment fund. Once we buy another house, then I won’t be keeping much in there, just about $3000. I think you made a great move and hopefully you will some positive returns.

  4. I had the same problem as you! It’s gotten a lot easier for me to not hoard cash as my cash flow has increased immensely since starting working. Until I opened my 401(k), 100% of my net worth was in cash, about $45,000. Before I bought my condo, 2/3 of my net worth was in cash. Now I’m down to only about 12% – a bit over $20,000 in easily accessible cash. I think that’s sufficient.

    Emotions definitely play a huge role in finances. They dictate how much I’m comfortable with in savings ($20,000 seems to be the current round number), how much of a mortgage balance I’m comfortable with (still not sure what that number is exactly), and where I really want to spend my money.

    I’ve definitely always hoarded my money and after starting working full-time, it was a huge lesson to learn how to spend it on the things I wanted. I think I’m doing better at that now, but it’s a continuous learning cycle.

    • The individual psychology of personal finance is fascinanting!

      I am totally about a “safe” number too! LOL – the last bit of irrationality, since it’s not really tied to any concrete benchmarks. If it doesn’t escalate in magnitude, however, we should be within the recommended 5% in a year or two (as out net worth increases).

  5. I have a substantial amount earning 1.3% because I was planning to put in a downpayment on a house sometime in the next two years; and anything with near zero risk is paying pretty close to this amount. While I could dump it in preferreds as Garth believes I should do, most of the preferreds are trading above their par value and have call options. You could lose a good 3-4% if they are redeemed by the banks at $25 a share and you paid $26 a share (most bank prefs are trading around $26/share). Bond funds are relatively safe until we hear of a BoC rate hike then they will drop, and the return is only about 2% on those if you’re lucky anyway.

    So if you’re going to need the money in the short to mid term (okay 1-3 years) I’m fine with the orange guy’s shorts. But yeah, that’s only if you have need of the cash and only after you’ve maxed out your TFSA and your RRSP room, of course. Every idiot knows that.

    • LOL! I don’t know about the RRSP aspect … some of us (ahem) have a LOT of built up contribution room. Considering the penalties for tapping RRSPs early, I wouldn’t feel comfortable tying up such a huge amount of money – especially as, going forward, I will be maxing out yearly contributions. But agreed on the TFSA! I am not sure why it took me so long to fully take advantage of that option.

    • I recently saw someone claim on an MMM post that he bought stock indexes plus put options to avoid losses greater than 10%, at a cost of only 1-2% per year. That might be an interesting alternative to cash if you’re ok with a small loss, but I haven’t seen options that cheap.

    • I’m with you. We are retired and have to be risk averse – we could be long gone before any market reversal has a chance to recover. Besides which, we are probably around the same age as Adina J’s grandma. We are the children of people who lived through two world wars and the Depression! Besides which, so much investment talk is all smoke and mirrors. So many “experts” sound like poker players, pumping their wins and glossing over their losses!

  6. I have the same problem, and I’ve gotten really great at justifying all the cash too. I think buying a house will be the big step that will get me out of the habit.

  7. Learning to control you risk aversion, especially at the young age, is probably a good thing.
    On the other hand I do miss the old days when savings were true reflection of your hard work and practical character. Today rewards seem to be rather random and disconnected from the individual effort, I mean if I bough a house in Toronto in 2010 I’m in much better shape than somebody who did the same thing in Chicago…
    I’m not sure if such “investment society” is sociologically/economically sustainable but I wish you the best of luck!

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