Why You Are Cash Poor

Are you cash poor?

Take a look at your balance sheet or net worth statement. If you’re like most people, almost all of your money is tied up in retirement accounts (IRA & 401k), your home and possibly 529 college savings accounts. If you don’t have much money outside of these accounts:

This screams “HELP I SPEND EVERY DOLLAR THAT MAKES IT TO MY CHECKING ACCOUNT!”

Roughly 75% of Americans are living paycheck to paycheck.

An even faster way to prove my point is to check your average savings account balance.

If your savings/money market account balances are:

<10,000 – you are living on the edge and not very well prepared for unexpected financial issues  (most people are in this category)

$10,000 > – <$20,000 – you’re ahead of the game

$20,000+ = peace of mind

$50,000+ = Got it made

Why are you cash poor?    YOU HAVE LITTLE FINANCIAL DISCIPLINE!

Face it – you can’t help spending money you can get your hands on.  If the cookie jar is open you get yourself some cookies. Damn the fact this is not good for you. The only reason you have as much money as you do in your retirement accounts is that your money was taken from your paycheck before you could spend it and there is a tax and penalty consequences if you reach into that cookie jar for your money.  Impulse buying is killing your finances.

You get whatever you want at the grocery store, probably eat out a lot and pay for most things with plastic. This is a recipe for a lousy, under achieving financial life with little peace of mind.

Not having liquid cash savings can be costly in many ways. For example:

1. Lousy peace of mind when you are living paycheck to paycheck.
2. No money for home improvements, car down payment new appliance.
3. Pay more for (home, auto, disability) insurance because you keep low deductibles
4. Whip out credit cards when dining out or grocery shopping (terrible habit that makes it easy to say “yes” when you should be saying no to impulse buying)
5. Go in debt for vacations, cars, home improvements and more
6. Use 401k loan as a piggy bank – end up being very costly when you pay your loan back with after tax money
7. No choice to retire before age 59 1/2 (IRA access without penalty)

The lack of financial peace of mind, not knowing how you are going to pay your next unexpected bill can be very stressful and I not ideal.

Most Americans are losing the temptation battle when it comes to parting with their hard-earned money.

If this sounds like you, it’s never too late to look in the mirror and decide to make a change. Start by setting up an automatic transfer from your checking account to a savings account at a different institution and make it hard for you to get your money back. It almost doesn’t matter if the account makes no interest (you can make about 2%) it’s much more important to put it somewhere that you can’t easily spend.

Once you’ve got that account set up and funded, set up your next savings account and invest that money for the long-term. More on that later.

The other potentially big problem with having all your eggs in the retirement plan basket is that if income tax rates go up when you want your money you can get left with a painful tax bill.