Have you ever wondered how and why a financial planner makes their own decisions around money?
This new series “Confessions of a Financial Planner” is for you.
Each month, I’m going to write one confession about an action I’ve taken that breaks a financial “general rule of thumb” or something I wish I had done differently.
In good old human fashion, I’ll also include my reasons, potentially excuses, of why I’ve done it that way.
I’m writing this because I want to show you the human side of financial planning. I often talk about how there is an emotional and economic side to every decision, and you don’t always have to choose the economic side of it.
Personal finance includes the word personal for a reason.
Let’s explore my confessions. The first one is about the amount of cash I held for years.
The Confession of a Financial Planner: I’ve Held “Too Much” Cash
My confession is that I’ve held a lot of cash for an extended period of time.
And by a lot, I mean a lot. I’ve held somewhere between $200k and $300k in cash since late 2019.
You may be thinking, ‘What the heck? Who is this person who claims to be a financial planner? Why don’t you have that money invested?’
If that’s your immediate reaction, I don’t blame you. I might be asking the same question if I didn’t already know my story or had experience working with hundreds of families over the past decade.
Through my work, I’ve learned that sometimes you have to go outside of the boundaries of what might be considered “normal” to live a more fulfilling life. Our money should be connected to helping us live our ideal life.
The cash did that for me.
I broke the rule of thumb to have somewhere between 3 and 12 months of cash on hand. I don’t spend $200k a year or anywhere close to it.
While that amount of cash sounds like a lot, and it objectively is, I can put on my financial planner hat and say it was appropriate.
Let’s explore why.
Reasons/Excuses of Why I Held A Lot of Cash
The reason I’ve held a lot of cash has changed since 2019.
While future confessions might have excuses instead of reasons, these are truly reasons. No excuses this time!
To sum up what has happened since 2019, below is a quick snapshot:
- I thought I was buying into a rapidly growing investment firm, then I didn’t.
- I quit my job and started my own company.
- I moved across the country with the intention of moving back in three years.
- I got married.
- Then, my wife wanted to do more training, so we bought a house and extended our time by at least three more years.
- My dad was diagnosed with Stage IV Lung Cancer in 2018 and died in 2023.
When I say life happened, I mean life happened.
I never imagined all of that would happen.
Let’s dive into each reason further to explain why I kept holding cash.
Buy In As A Partner
The cash didn’t used to be all cash.
At my prior firm, I had conversations with the majority owner about buying into the firm in 2019. While I hadn’t seen any paperwork, we talked numbers, what it meant, buy in, etc. It was an extensive conversation that was framed as it was happening at the end of the year.
Like a good financial planner, I now had an immediate need for cash in the next six months, so I decided to sell a large chunk of my brokerage account and put it into cash. I don’t remember the exact amount I sold, but it was likely north of $100,000, which added to my emergency fund.
I didn’t want that money at risk because I knew, or at least I thought I knew, I was buying into the firm at the end of 2019.
Except, that didn’t happen.
The majority owner I spoke to never sent official paperwork to buy into the firm. Good reasons were never provided, and I had many other partners advocating for me that it should have happened.
It sounded like it might happen the following year, so I continued holding the cash. It didn’t make sense to reinvest it and put it at risk for a year.
The pandemic happened during that time. I was grateful for that cash. When the market drops 30% or so in a span of three weeks, and it feels like the world is falling apart, cash can be a comfort blanket.
Unfortunately, many people fall into that trap and continually hold too much cash. I wasn’t holding cash because of the pandemic or as a reaction to the pandemic. I just happened to be holding cash during that time, and feel it’s worth mentioning that emotionally, it felt good.
I’m human. I get it when people say they want to hold cash when life feels uncertain, though I should mention life is always uncertain.
More conversations happened later that year about having me buy into the firm, but I was hesitant. I was burnt out from my workload, and the pandemic certainly didn’t help. Also, my wife (girlfriend at the time) was graduating from medical school and applying to residencies during this time.
For those who don’t know, the residency match process is pure, unadulterated chaos.
You apply to a bunch of different programs, set up alerts on your phone, stop what you are doing (no matter what you are doing) when you get a notice that you received an interview, schedule the interview (if any are left — even five minutes later, some programs had none), attend the interviews, and then you rank your programs. The programs also rank you.
Then it goes into a computerized mathematical algorithm that tells you where you are going to be living and training for however long your residency training takes. In my wife’s case, it was three years.
There was only one program in Washington state where we had been living. There were good odds we were moving for her residency.
Another offer came later that year to buy into the firm, but I declined at this point. I made an excuse about why I didn’t want to, but the real reason was the uncertainty around the match process, feeling burnt out, and I was having stress-related health issues.
Looking ahead to people who had been at the firm longer, I didn’t want that lifestyle.
I continued saving money in cash for the potential life changes ahead.
Move For Residency
In 2021, we learned that we would be moving to Wisconsin, my wife’s first choice program out of the interviews she was offered.
I continued holding the cash because for the longest time, we didn’t know where we would be living, and some programs are in small towns where rentals are extremely hard to find.
In that case, we may have wanted to buy a house, and the cash could have been used for a down payment.
By mid-2021, my wife was moving across the country, which isn’t cheap. I stayed behind a few months to wrap up my work and transition clients to other financial planners at the firm.
I also started leasing my townhome. I call myself a reluctant landlord. I never wanted to be one, but we wanted a place to come back to when my wife’s residency was done.
Having a mortgage payment on the townhome plus a lease on an apartment in Wisconsin now meant more liabilities. This was another reason to hold more cash.
What if a tenant didn’t pay the rent?
We saw during COVID how people were not being evicted even when people stopped paying rent. That scared me.
I often operated from a worst case scenario perspective because those are the scenarios that can drastically change your life. I felt I needed more of a cash buffer now.
Starting a Business
On top of moving and leasing my townhome, I decided to launch Kindness Financial Planning.
There is good data from those who came before me that you might make a small profit your first year, but you pay to work for most of it.
In year two, it gets better, but it’s usually still not fully covering your bills.
By year three, you usually start to cover your bills and may be able to start saving again.
Again, my pessimistic mind took over and wanted enough that if I didn’t make $1 for all of those three years, that I would be okay.
I added up my expenses, both personal and business, and a few what-if scenarios to decide that I needed $200,000 or so in cash.
What started as a potential buy into the prior firm where I worked was now going to support my own vision of starting a company.
I ended up paying to work for the first 8 to 10 months, and that cash supported me.
Revenue went up in my business and I started to think about investing that cash again, but then life (more precisely my wife) threw us another curveball. She wanted to do more training.
Potential Move for Fellowship
Remember the residency match process? Imagine doing that over again, but for fellowship.
There were slim odds we would be returning to Seattle given that there is only one program and throughout the interview process, it became clearer where we might end up.
My wife, the superstar she is, received many interview invitations and had about half the programs tell her that if she ranked them first, she would match there because the program planned on ranking her highly.
Although it’s not guaranteed, those reassurances were helpful.
It was a stressful time. After many conversations, it came down to two options.
Did we want to move and start over in Pittsburgh or stay in Madison?
My wife decided she didn’t want to start over again.
A little more certainty came back to our life now that we knew we would be in Madison for at least another three years; however, I was growing irritated with our apartment living.
We signed a lease on this apartment during the pandemic, having never seen it, and not knowing anything about the area. While it is a great area and was within walking distance to work for my wife, there are train tracks literally across the parking lot.
I often woke up to the train and generally didn’t appreciate having a loud train come by four to six times a day. Did I mention that we were also between two crossings? That meant we heard double the train horns.
The people in the building also were becoming more inconsiderate. People would let their animals pee and poop on the floor and not pick it up, hoard carts that helped us get groceries from the parking garage into our apartment, and more.
We tried renting a home, but after a few showings and one application, it became clear that trying to rent a pet-friendly house in a city that severely lacks housing, was not going to be easy. We planned on getting a dog, so we ideally wanted a fenced yard, which was even more challenging to find.
We decided to go the more difficult and risky route and buy a house!
There is more on that in a later section.
My Dad Was Sick
During most of this time, my dad was sick.
That’s relevant because my dad had some inherited money, but not much.
We were unsure what his cost of care would cost, and he was spending more than a thousand dollars a month on Uber Eats when he already had food. He also was spending money in illicit drugs to the tune of thousands of dollars a month, as well as had paid rent for a couple of months for a young person who took advantage of him.
Although I felt confident that I didn’t want to pay for my dad’s living situation if he ran out of money, that didn’t mean I wouldn’t change my mind when the time came. You simply don’t know until you get to that point.
Although Medicaid covers a lot, it doesn’t cover everything, and other expenses can add up quickly.
Given that care is often $7,000 or more per month, you could go through $100,000+ in about a year.
I also was never sure when I’d need to fly or drive home, which happened a few times. Those trips were usually a couple thousand dollars between airfare, car rental, and other expenses. My mom was gracious enough to help with those visits, but I never want to rely on someone for money.
My dad being sick was a giant question mark when it came to expenses, which was another reason I kept a significant amount in cash. You can read the lessons I’ve learned about death and money.
Variable Income
It’s worth mentioning that holding cash above and beyond general rules of thumb for people in my line of work is not uncommon.
My income is variable. If a client leaves or dies, I make less money. If it’s a slow time in my business or vendors raise expenses, I may not get a pay raise.
I’m not a W-2 worker that often can estimate their income for the year starting in January.
Although I don’t see myself as a “salesperson,” I do work in sales. That is one line of work that generally needs more cash to get through the bad times in the economy or in their industry. You can think of real estate agents, commercial real estate, oil and gas, and anything else that tends to be cyclical with the economy or goes through waves of good and bad times.
I didn’t hold extra cash during this time because my income is variable, but it’s worth drawing attention to it because I naturally hold closer to 12 months of living expenses in cash rather than 3 to 6 months.
Do I Regret Holding A Lot of Cash?
As you may have already guessed, I don’t regret holding the cash. It was 100% the right decision for my family and me, but it still is difficult to confess as a financial planner.
Would I have had more money if I had invested the money? Absolutely!
But the increase in net worth wouldn’t have been worth the stress and anxiety I felt at each life transition.
It’s a big reason that I’m a huge advocate for holding extra cash during a transition. I’ve yet to meet someone who held extra through a transition and regretted it.
On the other hand, I have met people who have not held cash, faced a major disruption in their life, and the lack of cash forced them into decisions they didn’t want to make — sometimes completely changing their path in life.
It could be being forced to shut down a business before it had a chance to take it off, foreclosing on a house, or needing to file for bankruptcy.
Cash provides flexibility. It provided that for me through the many transitions my wife and I have experienced the past few years.
Although there were times I didn’t know the exact purpose it would serve, I knew it would serve a potential upcoming purpose.
How Much Cash Will I Hold Going Forward?
You may be wondering, ‘Are you still holding a lot of cash?’
The answer is sort of, but a lot less than I was before. It would be a lot to many people, but it’s a reasonable amount given our liabilities.
My wife and I bought a house last year, which ended up being way more money than I anticipated between the down payment and repairs we needed to make.
Never trust that a leaning deck can be repaired. I’ve discovered how expensive decks are to replace!
Some reasons remain for the cash, but they have changed too.
Now that we have two mortgages, I want enough to cover those payments in case tenants stop paying, damage is done to the townhome I’m leasing, or my business doesn’t do as well as I am projecting.
I also like extra cash in case things break. The townhome is going to need a new roof in the next few years. My fingers are crossed our new house won’t need much additional work because we already did quite a bit of the big ticket items when we bought it, but you never know.
I also keep a fair amount of cash to cover estimated tax payments since I’m self employed. Those get paid quarterly, which means I naturally have a high balance, depending on when someone looks at my bank balance (usually right before estimated tax payment due dates).
We also hopefully will have another transition in a few years where we move back to Washington state after my wife finishes her fellowship. If enough life things align (healthy parents, financially stable, she finds her ideal job, etc.), we would love to travel for a bit before she starts working.
My goal is to be at about 12 months worth of living expenses plus any big costs we anticipate over the next few years. I’m hopeful life in a few years will have fewer transitions on the horizon, which will make holding less cash easier.
How Much Cash is Appropriate for Most People?
The title of this section is ironic, right?
You spent the last few minutes reading about how much cash being appropriate is person-specific!
Still, people like rules of thumb.
I believe most people should be reasonably comfortable with 3 to 12 months worth of living expenses in cash.
If you work in a volatile industry, such as real estate, then you may want to have more than 12 months. If you work for a university with tenure, I could see a valid argument for 3 months or less. If you are retired and can take regular withdrawals from an investment account that is fairly liquid, 2 months may be enough.
Don’t forget to pay attention to your emotions. If you are uncomfortable with 3 months worth of cash and you have the most stable job on the planet, then having more isn’t necessarily a bad thing.
Money should not control you, particularly if you have a simple solution, such as holding 6 months worth of cash.
For most people, once you get above 12 months worth of living expenses in cash, there generally needs to be a very good reason, or you start to hurt your long-term returns. Unless you are extremely wealthy, most people will start to see the effects.
But again, it’s a personal decision. It’s one you need to be comfortable with through good and bad times.
Final Thoughts – My Question for You
I never imagined holding a few hundred thousand dollars in cash for a few years, but then again, I never imagined the life changes I’ve experienced.
I wouldn’t advocate holding a bunch of cash. I’ve thought about the amount I’ve been holding a fair amount over the past few years and how I wish I could invest some of it, but life kept happening.
Each time, it was the right decision to continue holding it.
It’s provided flexibility, gave us a better living situation, and helped me grow my business. One could argue the “life return” on those are far better than the monetary return it could have earned investing it into the market.
I’ll leave you with one question to act on.
What amount of cash is a comfortable amount for you to hold?
