We have had a couple of prospective clients visit us lately who exhibited very similar characteristics when it came to their money. They craved safety. The dollar amounts that they were carrying in cash were significant by any measure. When asked why they carried such hefty balances in cash, their responses were revealing.
Typically most people keep money in the bank because they may need to spend it on an upcoming outlay, or they are uncomfortable with market volatility. These people were different though. One of them kept extraordinarily high cash balances because of a general unease with world events. The other was concerned about her husband’s potential for income volatility, as well as his health.
If history tells us anything, it is that market moves caused by exogenous events such as the death of a world leader or an act of terrorism are relatively short lived. There is just no advantage to be gained by trying to protect your nest egg from the vagaries of the global news cycle by holding oodles of cash. The comfort you feel is illusory. Prices continue to march higher. They may not be reflected in the CPI, which places a disproportionate weight on the cost of shelter. Older people who have higher medical costs are certainly experiencing a higher inflation rate for the things they purchase than does the general population.
What is ironic about both situations is that in attempting to address their feelings of discomfort in the present, they are robbing their future in terms of lifestyle or retirement security. There is certainly a role for cash in your financial life. Having significant balances, more times than not, indicates a paralysis in planning. When you don’t know what to do, it makes sense to sit on the sidelines, even though you realize that you may be compromising your future. Keeping excessively high cash balances can indicate the lack of a plan, doubts about the viability of your plan, or a lack of trust in your own ability to manage your money.