Fix It Friday Ep. 20 - Fix It Friday - Avoiding the Cash Accumulation Trap

• Excess cash should only be accumulated for a fixed and determinable purpose
• Behavioral finance biases often drive investors to hold cash out of fear rather than strategy
• Clear rules and separate accounts help prevent emotional decision-making

Disclaimer: [00:00:00] The following podcast by Fusion Family Wealth, LLC Fusion is intended for general information purposes only. No portion of the podcast serves as the receipt of or is a substitute for personalized investment advice from Fusion or any other investment professional of your choosing. Please see additional important disclosure at the end of this podcast.

A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or at www.fusionfamilywealth.com.

Jonathan Blau: All right, welcome to another episode of. The Fix It Friday edition of The Crazy Wealthy Podcast. Today's gonna be a relatively short e episode just because the message is short but [00:00:30] important.

There's no correlation between the length of this message and it's important, so I want to emphasize that.

Voiceover: Welcome to The Crazy Wealthy Podcast with your host, Jonathan Blau. Whether you're just starting [00:00:45] out or are an experienced investor, join Jonathan as he seeks to illuminate and demystify the complexities of making consistently rational financial decisions. Under conditions of uncertainty, he'll chat with professionals from the advice [00:01:00] world, entrepreneurs, executives.

And more to share fresh perspectives on making sound decisions that maximize your wealth. And now here's your host.

Jonathan Blau: I want to talk today about what [00:01:15] I call avoiding the cash accumulation trap. So if you find yourself as a long-term investor looking at your allocation of assets and you see that a lot is accumulating in cash.

What I'd [00:01:30] like to address is there's generally four reasons that we accumulate cash, and the first reason that I'm gonna articulate to me as an investment advisor and planner is the only real legitimate reason, and that is if I'm accumulating a fixed and determined [00:01:45] amount of cash. For a certain e expense item that is identifiable, I'm gonna help my children buy a home in six months, or I've got a tax bill coming up, or anything along those lines.

That's the one, first of the four reasons, and [00:02:00] that's again, to me, the only legitimate reason to accumulate excess cash. The other three reasons, um, that we accumulate cash, uh, usually can be identified as, as the reason we're doing it, either one of the three reasons [00:02:15] or, or a combination of all three. So the first reason that I find people accumulated out of cash is they don't have a plan.

Well, we don't have a plan. Gravity pulls that cash to its most natural end, which is our savings or [00:02:30] bank account. So the first reason we don't have a plan. Second reason is have a plan, but it backfired on us. And so I'm now gonna abandon my plan and, uh, since I'm no longer following it again, gravity's pulling that cash to the most [00:02:45] natural.

Safe place in our head, which is, uh, the bank account and checking account. And the third reason, which is an interesting one, because it deals with a deep psychological issue and a bias that we have called regret aversion bias. So if we've [00:03:00] accumulated cash over time, and somewhere along the lines we took some of that cash, bought something with it, or invested it in something, and the outcome of our purchase or the outcome, our investment was so painful.[00:03:15]

We never want to deal with that kind of an outcome again, and in order to avoid that outcome and the regret associated with it. Regret aversion bias kicks in and leads to what's called status quo bias. If I simply just continue to leave this [00:03:30] money in cash now, instead of buying that thing or something like it, instead of investing in what I invested in, or something like it that has that horrible outcome, uh, I, I will never have to face it again.

Just leave it in cash. Status quo bias. Those are the four reasons. Either I'm [00:03:45] saving for a fixed and determined expense, or I have no plan. Have a plan that I've abandoned or I did something with the money I regret to avoid. Future regret status quo, just leave it in cash. So what do we do to, uh, to [00:04:00] address this kind of an issue?

First thing is what we should do is we should write down and stick to a particular line in the sand with respect to accumulating cash. So if I know that I've gotta save a hundred thousand for [00:04:15] taxes, for example, once I get over a hundred or over 150,000, anything over a hundred needs to go into my long-term investment savings and stick to that kind of plan.

Also I recommend, uh, accounting differently for cash [00:04:30] being accumulated for a purpose, uh, as we described, fixed and determinable expense. Keep that in a separate bank account always than cash that's being accumulated. That should go for investment. And if you do those couple of things and write [00:04:45] down the purpose of what you're saving for and how much, leave that in a separate account that should help you to, uh, to, to mitigate the chances that you're accumulating cash.

For any of the wrong reasons, so hopefully this has been helpful. The cash accumulation trap, how [00:05:00] to avoid it, what to do about it, how to identify it. Um, look forward to talking to you on the next episode. In the meantime, you can always get our, uh, fix it Friday episodes along with the other Crazy Wealthy episodes on our Crazy wealthy [00:05:15] podcast.com, uh, website.

Our uh, fusion Family Wealth. Dot com website and all of your favorite venues for listening to podcasts.

Voiceover: Thank you for tuning into another episode of The Crazy [00:05:30] Wealthy Podcast. For more insights, resources, and to sign up for a newsletter, visit crazy wealthy podcast.com. Until then, stay crazy wealthy.[00:05:45]

Disclaimer: The previous podcast by Fusion Family Wealth, LLC Fusion was intended for general information purposes only. No portion of the podcast serves as the receipt of or is a substitute for personalized investment advice from Fusion or any other investment professional of your choosing. Different types of investments involve varying degrees of risk, and it should not be assumed that future performance of any specific [00:06:00] investment or investment strategy or any non-investment related or planning services, discussion or content will be profitable.

Be suitable for your portfolio or individuals situation. Neither fusion's investment advisor registration status, nor any amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Fusion is engaged or continues to be engaged to provide investment advisory services.

Fusion is [00:06:15] neither a law firm nor accounting firm, and no portion of its services should be construed as legal or accounting advice. No portion of the video content should be construed by a client or perspective client as a guaranteed that he or she will experience a certain level of results if Fusion is engaged or continues to be engaged.

To provide investment advisory services, a copy of Fusion's current written disclosure brochure discussing our advisory services and fees is available [00:06:30] upon request or at www.fusionfamilywealth.com.