Women with Debt Can Still Have Too Much Cash

I got some feedback that my last post about women having too much cash seemed pretty 1%.  “Only people without debt end up with too much cash.”  Well, as someone with debt who also had (has?) too much cash, I can tell you those two things aren’t mutually exclusive.  Here are a few examples of real women with and without debt who also have too much cash (or cash-like investments – that money market fund counts!).

It’s not just money under the mattress or in your checking account, keeping your retirement accounts (401K or IRA) in a money market fund counts too!  Over a 35-year period, not investing can translate to a $500K gap in retirement savings. Read my last post for more details. Then, read the following scenarios and see if they’re similar to your situation:

examples of women having too much cash:

1. You have $15,000 in cash but $10,000 in credit card debt.  Stop paying the banks that high (13% or more) credit card interest rate each month.  The reason you need an emergency fund is to protect yourself from credit card debt, so use that cash now.

2. You have $150,000 saved as a down payment on a house but aren’t ready to pull the trigger yet.  If you know you’re a year or two away from buying, consider investing some of that money.  A key reason not to invest is that you’re afraid the market could fall and you could lose money you need.  However, if you invested some of your down payment, think about how long it would take you to save that money again.  If you could earn that money back before you think you’ll be ready to buy, consider investing at least some of that nest egg you’re sitting on.

3. You’re sending money each month to a retirement account (IRA or 401K), but you haven’t actually invested it.  As a result, those monthly transfers are adding up into a growing stack of cash (in this case in a money market account).  Just because the money isn’t in your checking or savings accounts doesn’t mean it’s not still “cash or a cash-like instrument.”  In October 2019, the Vanguard Money Market Fund has had a 0.55% 10-year return.  That’s great until you factor in inflation and the fact that the broader market has averaged a 14.02% return over the past 10 years.  If you’re a 30-year old with $50K in a money market fund, you probably have too much “cash.”  Raising my hand because this was / is me.

4. You have $100,000 in cash but $77,000 in student loan debt.  You have decided not to pay off the debt because it has a low interest rate (only 3.75%)…but then you didn’t invest that really big stack of Benjamins. So, if you have a low student loan rate, that’s what you call “good debt” and it can make sense to take a long time paying it off.  However, the math only works if you’re earning more than 3.75% interest on the money you’re keeping.  SO, outside your emergency fund (4-5 months of living expenses), ask yourself if you really need that extra cushion or if you’ve just listened to one too many episodes of the Casual Prepper.

5. You just got a raise at work or a surprise bonus (yes, sometimes those happen) and haven’t made a plan for that extra money. Sometimes, you get to celebrate a big work accomplishment.  Pat yourself on the back or shake your head at your boss for not cluing you in on the extra bonus payout you get at your new gig.  Once you’re done reciting your “love yourself affirmations,” figure out what you’re going to do with the extra money.  If you’re smart and you don’t up your spending to your new pay level, you’re going to notice some extra money sitting in your bank account each month.  Automate those payments to a savings goal you have e.g., maxing out your 401K, building up an emergency fund, setting up a brokerage account (last post had some good suggestions here).

One action to take from today is to figure out how much cash you have as a percentage of your net worth (note: include money market funds in with the money sitting in your checking account). You can use the table to the right as a guide. Blackrock found that women keep 68% of their money in cash versus 59% for men. High-earning, college-educated women invest at much higher rates, but I estimate this cohort has as much as 33% of their net worth in cash. I would bet male peers have less than 20% that is similarly liquid. What have you seen based on your experience?