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