Keeping lots of cash at home is risky for many reasons. But that doesn’t stop people from often following this depression-era bad habit. Find out from Jan how much you should keep on hand and what you should do with the rest.
#NowMe Episode 9: Mattress Money
Ms. Walker: Hello, this is Hollis Walker with Jan Blakeley Holman, director of advisor education at Thornburg Investment Management. Welcome back. Thanks for joining us for another episode of #NowMe. Well Jan, we’re headed into fall and even if we anticipated that COVID would be with us a long time, most of us probably had no idea what it would be like to live in this pandemic world.
Ms. Holman: Well, thanks Hollis. It’s nice to be here, in the dog days of August, as we call them. I kind of kept you guessing on what the subject is today, didn’t I?
Ms. Walker: Yes.
Ms. Holman: Well, here’s what it is. Recently I’ve had a few people ask me questions about money, and although I always recommend that they talk with a financial advisor, I have no problem giving them information to help them understand some of the basic principles of personal finance. So, I talked to a few people, and in each of these situations, I found out that they were in fact storing a pretty significant amount of cash in their homes.
Ms. Walker: So, we’re going to talk about hoarding but not the toilet paper, hand sanitizer kind of hoarding, right?
Ms. Holman: Well I don’t know if I’d call it hoarding, but it is an inappropriate and unhealthy way to store cash. In the examples I was discussing, when I say significant, I mean significant. Let me take two of the situations. In the first one, the person had $7,000 stored in an empty guitar case. In the other, the individual had $10,000 in cash in plastic bags in the closet. Now here are the things that these two people had in common. First, they’re both self-employed, and second, sometimes they’re paid in cash.
Ms. Walker: Okay. But almost everybody I know keeps a stash of cash at home especially people, as you said, who get some of their income in cash. One reason to have cash at home is, you know, there’s this notion that someday there might be a big global hack and none of the ATMs will work, and we won’t be able to get any cash. And, then there’s this friend of mine who has always had a big stash of cash at home. She pays the gardener and other contract workers who come to her house with that money. She lets her housekeeper get into the stash and go to the grocery store or pick up the dry cleaning, and then she always has cash to pay tips, like to delivery people. And I’m sort of the same way. I have to admit, I always have a little cash on hand. I keep it around to pay my handyman. Recently, I offered cash to the plumber, and he gave me a really good discount. So, there is this cash economy that goes on all the time, and for me, I think having that money at home gives me this feeling of security, and I’m not sure any piece of paper with numbers on it can give me that feeling. So, why are you so concerned about people having money at home?
Ms. Holman: Well first of all, this is one of those things that advisors probably have to deal with a lot because they’re asking perspective clients and current clients how much money they have and where is it and those types of things. I should say that it’s important to remember that self-employed people are responsible to report any income and tips they earn for income tax purposes, and in each of the cases I was referencing, these people have kept detailed records and they’re responsible about reporting their income. So, it isn’t a situation of tax evasion on a small scale. But here’s why it concerns me. I think there are a lot of people who are doing this, particularly now because a lot of individuals have lost their jobs and they may be taking odd jobs and getting paid cash for it. One of the things I heard from both these individuals was that friends had told them if they had money in a bank account, the IRS will come and tax it. Now that didn’t even make sense to me. It didn’t make any sense because that’s not true especially since they’re reporting their income. The fact is it’s just not safe for people to have that much money sitting in bags in the closet. Think about a fire. If you have home insurance or renter’s insurance, the insurance companies are not going to reimburse you for cash that you have in the house. What about a friend who has sticky fingers, as we call them, or a roommate? A better idea would be to have a smaller amount of cash and deposit the rest in a bank or credit union. That said, it’s important to remember that when a person deposits more than $10,000 of cash into a financial institution, the financial institution is obligated to report it to the federal government because of terrorism concerns, money laundering and drug dealing related issues.
Ms. Walker: So, if you’re going to make that extra money in cash and you’re going to put it in the bank, you should be aware that the IRS will know you’ve got it.
Ms. Holman: Well it’s going to have to be a significant amount of cash.
Ms. Walker: Okay. So, I’m with you. I’m not going to have $10,000 at home. But I will say that I do keep my money in a fire safe, and I’m not too worried about friends, although maybe I shouldn’t invite you over to my house.
Ms. Holman: I’m not going to go looking through any of your closets or cupboards, I promise. I think this also is a good indicator of how an individual is or isn’t managing their finances. Putting money in plastic bags is not money management. It’s disorganized. It’s not well thought out, and it’s really a throwback to the depression era where people really didn’t trust the banks. So, I have a number of friends whose grandmothers pretty much beat it into their parents’ heads that they have to have cash because the banks aren’t safe. And I would guess the individual who has a lot of money under their mattress is often the person who hasn’t talked to a financial advisor, and they’re missing out on a lot in terms of education and opportunity. Again, as an aside, one of the individuals who I talked to had a pretty good chunk of cash in their house also had a balance on a credit card that they could easily take care of by paying off that credit card. So, I understand people aren’t earning interest in the banks, but credit cards are charging really high rates of interest.
Ms. Walker: So, if I had a lot of money sitting in my fire safe and I had a high credit card account, I’d be better off paying off that credit card?
Ms. Holman: Well, you know, you and I have talked in the past about the rule of thumb being that a person should have six to nine months’ worth of expenses in an investment vehicle, or a savings vehicle is a better way to say that, a savings vehicle that is readily accessible. So, after the six to nine months of cash is there, then they should look at other options.
Ms. Walker: And I think the point for me would be that if I had too much money in my fire safe that money wouldn’t be earning any interest regardless of how small the interest rates are right now, but also I can’t take advantage of dollar cost averaging either.
Ms. Holman: Well if you’re putting money into a savings account, there’s no dollar cost averaging opportunity because the price doesn’t fluctuate. But if you have excess money in savings and adding the money that you have in your closet or under your mattress would make it so that you have extra money to invest, yes, you’re not taking advantage of investment opportunities where there is price fluctuation and where you can dollar cost average into something.
Ms. Walker: So, I want to go back to the discussion of mistrusting banks that came from the depression, and the people who lived through the depression had good reason not to trust banks. But now we always hear these commercials about, you know, insured by the FDIC. What exactly does that mean?
Ms. Holman: Well the FDIC is the Federal Deposit Insurance Corporation, and actually the FDIC law came into play, as many of the financial laws did, during Roosevelt’s tenure in about 1933, and under the FDIC insurance, each account is insured up to $250,000 per depositor, per insured bank; now, in cash. Sometimes people misunderstand that and think it means that investments are insured up to $250,000. No, we’re talking about cash in the bank, deposits in a bank.
Ms. Walker: Up to $250,000 per person, per bank.
Ms. Holman: Per ownership.
Ms. Walker: Yeah, per ownership, yeah. So, it could be me and my spouse who have this together, but that’s good to know because the commercial used to always say up to $100,000, so –
Ms. Holman: Well, you know, inflation?
Ms. Walker: Yes, unfortunately, I do know inflation. Jan, that’s all the time we have today. You’ve been listening to #NowMe with me, your host Hollis Walker and Jan Blakeley Holman, director of advisor education at Thornburg Investment Management. If you want to suggest a topic for us, email us at email@example.com. If you’d like to hear more episodes of #NowMe, you can find us on Apple, Spotify, Google Podcasts or your favorite audio provider or by visiting us at Thornburg.com/podcasts. Jan can also be found on LinkedIn. If you like us, subscribe, share us on social media and leave us a review. Until next time, thanks for listening.
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