What ‘Cash Hoarding’ Does to Your Finances, According to Ramit Sethi
Written by
Adam Palasciano
Edited by
Ashley Barnett
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Everything is expensive these days, there’s no doubt about it. Economic uncertainty and persistent inflation mean that you need more money for everyday expenses. For some, this can translate into fear, which can lead to “cash hoarding.”
Financial guru Ramit Sethi highlighted the meaning of “cash hoarding” in his recent “I Will Teach You To Be Rich” podcast newsletter. Cash hoarding is essentially when you keep excessive cash in your checking account that isn’t working for you. This practice can decrease the value of your money and prevent significant financial growth.
He took a deep dive into one of his reader’s finances, who explained that she “tends to be a cash hoarder.” She views cash as “security,” so much so that she currently has $19,000 sitting in her checking account.
Those who are financially savvy understand the importance of investing, paying off credit card debt, reducing tax liability by contributing to a retirement fund, and taking advantage of a high-yield savings account. Taking a simplistic approach and just looking at your checking account balance isn’t going to get you far.
Here are some tips on what to do with your money to avoid cash hoarding like this reader, according to Sethi and Markdale Financial Management. For example, $19,000 would be put to much better use simply by parking it in a high-yield savings account rather than a zero-interest checking account. If you consider a 4% APY compounded daily, that would equate to $760 in interest after just the first year. Proper budgeting can help you get a better understanding of your cash needs.
Overcome Cash Hoarding Bias
Generally, there are two main reasons why investors hold too much cash. First, it’s timing the market. This means waiting to buy stocks until the market dips, which doesn’t yield the best results. Instead, be sure to use a dollar-cost-averaging strategy and buy stocks consistently despite market swings. This practice usually results in a better return over the long term.
Second, it’s fear. Fear of losing money or not having enough money can actually have more detrimental effects despite having access to plenty of liquid cash in your checking account. Your money will serve you better if you save or invest it properly.
Set Up Automatic Investments
If you want to avoid cash hoarding, setting up automatic investments that align with your payday is a great idea. This way, money will get deducted from your checking account automatically and invested in a specific stock, ETF, or mutual fund without even thinking about it. You’ll benefit from long-term wealth accumulation and the magic of compound interest. Likely, you won’t even miss the money since it’ll be taken out at the same time that you’re paid.
Don’t Overspend Because You Hoard Cash
Hoarding cash in your checking account can make it seem like you have a lot of money at your disposal. It’s easy to spend money, especially if it’s readily accessible to you. However, don’t be fooled: cash hoarding should never lead to overspending. Instead, allocate more money toward saving, investing, and paying down debt. Consider cutting back on expenses by only buying store-brand groceries or getting a cheaper car to keep maintenance costs down.
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