Make your cash do its job

It happens in life, sometimes through a tax return, severance payment, increased income, inheritance, or the sale of a house. There are occasions when cash comes your way in a lump sum. 

It can be a good problem to have, but a solved problem gets you closer to your goals.

In this episode of SARA MAKES SENSE, we withdraw the myths about cash and deposit some useable, workable takeaways to solve your cash problem.

 Blog post related to episode:  https://www.wddevelopment.ca/blog/

Got a question for Sara? Send her an email at ask@saramakessense.ca and she might respond to it in an upcoming episode

Sara's website is https://www.wddevelopment.ca/ 

Transcript

Sara McCullough: (00:01)
Yeah, I'm completely not ready. So let's do this thing.

Sara McCullough: (00:07)
Laughs.

Sara McCullough: (00:13)
We've all heard the cliches about cash. They make cash sound easy, desirable, powerful. If that were true in a day to day lived experience way, I would have really different conversations with clients. Cash isn't always easy. It's desirable and scary at the very same time. And it's a strange way to translate our emotions

Sara McCullough: (00:36)
And we can't exist well in this world without coming to terms with cash. Today, we're going to talk about how to time the ins and outs and why that matters, how to let cash be still and why you would do that, and how to work through your options when there's too much cash. If cash is everything we say it is, why do so many people make mistakes, hesitate and get overwhelmed when it comes to money. As we go through this episode, I'm going to talk about some of the conversations that I've had with clients over their clingiest cash problems. You might recognize your situation in one of the conversations, or you might be better able to clarify your own question by the end of the episode, as I talk through these client conversations, I obviously will not use client's real names on the podcast here. We'll use Josh and Annabel as representative names so that I can maybe stop saying my client. I'm Sara McCullough and this is Sara Makes Sense.

Sara McCullough: (01:38)
Let's start by talking about what cash is and what it isn't. The concept of cash has become a bit more slippery as we now do most transactions online. Cash is money that belongs to you. Depending on where the cash is, you have choices to make over what the cash does for you. Cash isn't debt or your ability to borrow. My first conversation with Josh, my hypothetical representative client; in our first contact, he mentioned that he had 700,000 in cash, and he wanted a plan to review investment options, including purchasing another property or renovating the current property to generate income so that the cash wasn't just sitting there. Once we spoke in detail, he doesn't have 700,000 in cash. He could borrow up to another 700,000, which would've been secured against the two properties that he already owns. That's not cash that's debt. 

 Sara McCullough: (02:37)
If he did, in fact, borrow to the maximum currently allowed by the bank, the two most immediate changes would be that Josh in fact does not own the two properties in his name and his monthly fixed expenses would go up in a manner that's largely beyond his control. So, cash is money that belongs to you. Debt is money that you owe other people or institutions. Why is this so hard? Partly because we think it's supposed to be easy. We think that everyone can do this except us. We can't figure out why we can't do it. 80% of my client conversations are about how to manage, change, or adjust the regular ins and outs of money so that it doesn't drive them crazy. Your cash will start to become clear when you realize that all of your money has a job, all of it. Confusion, frustration, and risky decisions happen when you aren't clear on your money's job. Okay? So if your money has a job, what is it?

Sara McCullough: (03:36)
Let me give you an example. So, most of us pay regularly for housing on some level. So, you're paying $1400 a month in either rent or a mortgage payment. So, when your income comes in from your paycheck, your business, your retirement funds, however you're doing this, your income comes in, subtract $1400 from that amount because that's its job, to pay for housing. The rest of your money may or may not have other jobs, but $1,400 of your money has a job, to pay for your housing. So if we talk about things that are maybe a little bit bigger and don't happen regularly, let's say you want to buy a car in two years and you think the car might be around $40,000. If you just do straight math on that, that's $1,666 a month of your money has to be set aside to pay for the car in cash in two years. So again, you're gonna pay for your housing. You're gonna do the other regular things that you do. But out of the income that's coming in, $1666 its job is to pay for the car in two years. All right? All of your money has a job.

Sara McCullough: (04:59)
So if your money has a job, sometimes it shows up late for work. So going back to Josh and Annabel, when they first came to me their biggest complaint was, we make good money, we always feel short on money, in fact, over the last three years we've used our line of credit and we keep thinking that it's going to be gone when we get our income tax return, or we're gonna make some adjustments, or we think the next paycheck we'll pay back the line of credit and that's not happening. We just keep dragging around this line of credit. We make really good money and we can't figure out what's going on. And so there were a few fixes that we did that seemed tiny, but were huge for their ability to understand the ins and outs of their bank account and to actually smooth out their use of the line of credit.

Sara McCullough: (06:00)
One of the things that we did was I looked at the timing of when their money was coming in, versus when the payments were going out. And four of their biggest payments did not happen when the income came in - it happened in between. So they weren't clear on the money's job. The money came in, they would see the balance. They would think, hey we've got $4,000. No, you don't. Some of it has a job, but the timing made it confusing for them. They put the money somewhere else. They asked it to do another job and then it wasn't there to do the payment job. So, we lined up the timing of the payments with the timing of the income coming in, solved the problem; they stopped using the line of credit. It took about six months to solve this. They had done about 18 months of frustrated worrying about it.

Sara McCullough: (06:56)
So then we looked at what other jobs have you asked the money to do? They had car payments. They have two kids in their mid-teens, so the kids had activities. So, once I was able to outline, these are the other jobs that you've already given your money, and this is the amount that doesn't currently have a job, but you've told me you want to save for a vacation, we still need to buy groceries, buy clothes, do a couple of other day to day things, so this is the money that's gonna do that. But on this side of the page, this is the money that already has a job. So don't spend it twice. Once we went through that, it really took away the worry. And it took away that line of credit use. So they weren't actually short on money but you've got to make sure that your money is showing up on time for work.

Sara McCullough: (07:47)
Now, this is gonna be a short note, but sometimes your money also lives somewhere. And when it does, once it's there; give it a job that matches where it's living. I think the clearest example of this is your RSP. When your money lives in an RSP it's intended to fund your retirement. When you take money out of your RSP, even for the first time home buyer's plan, you've asked it to do a job that really conflicts with where it's living, right? When you go to work, you probably go to your office, not to the gym. Don't confuse the use. For the most part, clients are better off not using the first time home buyers from their RSP. If you do, I strongly recommend that you have a clear plan to pay it back, otherwise, part of you thinks that you've saved for retirement; the reality is you bought a house, both good things - really different. All right, let's summarize, cash is money that belongs to you.

Sara McCullough: (09:01)
Debt is not money that belongs to you, it's money that belongs to somebody else; you're using it for now, but you have to pay it back, those are not the same things. Your money has a job, all of your money. Know the job, know what decisions you've already made, what jobs have you already given it? And then you will know what jobs are still available or what decisions you can still make on it. If you didn't, or you don't, have clear job expectations for your money, you're going to feel confused and frustrated and feel like you're not getting anywhere. So part of this is you as the manager, giving your money clear job expectations and reviewing that. One of the things my clients really love when we work together over a number of years is seeing the things that they've accomplished over time, right? Seeing the changes in their debt levels, seeing the changes in their investments, seeing all of the things that they had goals for that we've actually gotten done. Sometimes in day to day busyness, we forget what we've done and what we've accomplished and the goals that we've achieved. So your money has a job. Make sure the money's clear, make sure it's showing up for work on time and make sure that you've got clear expectations for that money.

Sara McCullough: (10:39)
The next thing we're gonna talk about is surprise money. You can end up having more money than you expected. Sometimes it's a onetime thing. Sometimes it's an ongoing thing. For all of you out there who just thought, Sara, that's not a problem, I would love that; I would love to win the lottery tomorrow. Kind of, but not totally. All right, it is, surprise money is stressful and it sparks some decisions. Some again, it's gonna bring up all that confusion. If you're in the previous camp where you didn't give your money a clear job or you don't really know, and then you get this surprise money, it's confusing.

Scene from Brewster’s Millions: (11:23)
Now, what I would like to do is go to the north pole, select a good size iceberg and simply dig out a chamber from the rear-end of it. Drop in two 20,000 horsepower Marine diesel engines and sail, ah, Brewster bird, number one to Mecca. What do you think, sir? Hello. It went up. We'll sell it. Don't sell it. You buy it when it's like that. It's a great idea. What's your name? Luther. Listen Luther I like to bet on every long shot in every race, 50 to 1 and over this week at Aquaduct for the week five, five. Oh yeah. I can cover it. Great. How much would it take to get this off the ground? Oh no, no, no, no, no. This thing melts and he knows it. We would experience a loss of only 18% through evaporation and melting on the entire track. Hey, think of what that means to all those thirsty Arab farmers. It's great. What thirsty Arab farmers? There aren't any, there just aren't any cause there's no farmers in the desert Bonnie. Well, I think that's unfair.

Sara McCullough: (12:17)
What you just heard was a scene from the movie Brewster's millions, the version with the late Richard Pryor and the late John Candy, distributed by Universal Pictures. And so when I say that sudden wealth is hard or that money can be shaming or that surprise money is difficult. What I mean is, if they made a movie, and they didn't just make it once, the one with Richard Pryor and John Candy is a remake. So they made it twice. Millions of us went to see it. I'm just saying, this isn't easy, it's hard.

Sara McCullough: (13:04)
This has always happened for clients, I think right now, with COVID, for some people they're on a “I have less than I thought I would”; other people are on a “I have a higher bank balance than I thought I would because I'm not spending the same way; I'm not commuting to work, our costs have shifted over the year”. So, in this surprise money, we're talking about smaller amounts anywhere from $5 to $40,000, and then the question is; do I pay down debt or do I invest that money? Google that and what you're gonna get is a slim list of things. Most of which have precious little to do with your own situation. You are going to get a list of opinions from people who don't know you, who don't necessarily care to know you, who are possibly trying to sell you something because it benefits them in some way, depending on which side you pick.

Sara McCullough: (14:16)
So how do you do this because it's a big question and I talk about it with clients all the time. So how do I provide a framework for people like Josh and Annabel to make a decision over surprise money? The first thing we need to do is prioritize;, so what's important to you, what do you want to do in the next year, in the next three years, over time? All right, so this is the tiny goals. Where are you right now? What would bring you the most fun from this money? Sometimes we forget to talk about that, what fun things can we do with our money? And then over time, what are those big overarching things that you really want to accomplish in your life? So, I'm gonna talk to people about what's your priority list, and I'm gonna, I'm gonna show that back to you.

Sara McCullough: (15:16)
So we're gonna have a conversation, next meeting I'm gonna say, this is what you said. I'm then we're going to talk about your personal tolerance and your personal risk level. Most of us have, it's almost like a genetic setting, you're either debt adverse; so you're gonna say Sarah, I want the mortgage gone as soon as possible and I don't even want to talk about investing until it is gone. Or we've got some debt friendly genetic program out there, those people don't mind carrying debt. Um, and so that's where the personal tolerance comes in so as an advisor, I'm listening for, again, what's most important to you, but what is also going to give you, um, either the biggest relief, the biggest amount of fun. So this surprise money amount, how do we get the most amount of either, um, settling anxiety, feeling a sense of accomplishment; how do we do that?

Sara McCullough: (16:24)
So that's your personal tolerance of debt versus savings. There will be a component in there of personal risk. If you've got a really huge mortgage and we've got a relatively small surprise amount probably should go to the mortgage, especially if you're in an industry where your income fluctuates, right? So that's that personal risk. And that's where I, as an advisor might say to you, I understand the mortgage doesn't bother you, but it's these other risk factors that I would like you to protect yourself a little bit more in here. So here's why I'm gonna show you this, even though you told me you don't mind the mortgage, and then we're gonna look at some actual math. So if you took that $10,000 and put it in an RSP, or you took that $10,000 and put it in your TFSA, or you took that $10,000 and put it on your mortgage, you're going to numerically see what difference does that make to you; today, tomorrow and in the real far off.

Sara McCullough: (17:23)
All right? So that's how I'm going to present it, so that you can make a choice that you can live with. Ultimately, this is your life. It's your plan. I think where we get really tangled up sometimes in these decisions, is we make a quick decision; we regret it and then we're gonna go take revenge with our own money somewhere else, right? If you put the money in your RSP, but the mortgage really bothers you, as counterintuitive as it seems, because you didn't get the relief from paying down the mortgage, you're likely to get more stressed out. And again, counterintuitively, you're likely to probably go book a vacation; possibly increasing your debt. You're gonna put it on the line of credit, cuz you put that $10,000 in your RSP. So again, we can really, um, shoot our own plans in the foot without really realizing it. So with that surprise money amounts, we need to prioritize, talk about your personal tolerance and your personal risk factors. I'm going to show you the actual math and you're going to make a decision then and it's going, it's much more likely, to be a decision that makes you happy, removes anxiety and settles you to make clear decisions in the future.

Sara McCullough: (19:11)
Now we're gonna talk about the you're surprised you have money category. I said earlier that if I offered to drop a million dollars in your bank account, you would probably take it and you'd probably say it was super exciting and know you had no concerns and just let me give you the information so you can get that over to me, Sara. I deal with a lot of clients who have a lot of shame in how much they're earning and that really blocks their ability to make decisions and it can get in the way of relationships and it leaves a heavy, heavy sense of responsibility that can be paralyzing.

Sara McCullough: (20:16)
I often hear from clients, Sara I was, I was raised in a blue collar household, we didn't, we had enough, but we didn't have extra. And I earn more than I expected and I don't know what to do. I don't know how to make decisions. I, I just don't know what to do with this. As I said, it's often paralyzing, it's uncomfortable and in my experience, if we don't deal with that directly in meetings, the plan doesn't necessarily stick for the client. It's numerically, correct. It's based on their goals. But if we haven't specifically talked about how they feel about wealth and about cash and about excess cash, often I find the clients are not executing on the things that we've talked about and on the things that they told me were important.

Sara McCullough: (21:28)
And I think if we can adjust this for those of you who are in that space right now, if we can adjust this, I've heard so many amazing ideas from clients and when I get to see those happen, I think it's life changing not only for those clients and their families, if enough of us can do this; that can change society. For all of those things that we, that we talk about, that we rant about, that we say we wish were possible and why can't we change these things? It's possible. It's possible. And I think sometimes it's very, very tiny conversations that will free up that block and down the road kind of release that money to do what the owners ultimately want it to do. And I think that's really exciting.

Sara McCullough: (22:38)
All right, so my hypothetical representative, Josh and Annabelle, get a gift. So, they're already fairly financially secure. They've got a good retirement plan. They've paid off their debt. They've been very disciplined because by nature they are savers, not spenders. And then Annabelle gets a gift and it's big, it's a six figure gift. And it was interesting when they called me because I've known them for a number of years and they called me and said, you know, Annabelle got this gift and we'd just like your advice. And so on that first call, it was quite short, neither of them wanted to give me the number of the gift, the amount.

Sara McCullough: (23:31)
All right. So I sent them just a short form after and said, can you just let me know so that I'm prepared for our phone call? How much was the gift? What are your questions? And what would you like to do with the money? What are you thinking? Because they said they had thoughts for the money. So I get the amount back, and as I say, it's big, and they're already financially secure, and they're already savers, not spenders. And with the amount comes a chart of the things that they want to do with the money. And so they did in theory, spend all the money; which again is fine. They are financially secure today and they have done enough work that they're their retirement as far as we can see, is also financially secure. So in this chart were some renovations that they wanted to do on the house for about $120,000 and the chart had a couple of columns and so the time column, they were going to do these renovations in two to three years. And part of what they were asking me was, so we'd like to do this in a couple of years, but where do we put the money while we're waiting to do that?

Sara McCullough: (24:56)
Now it's a whole other conversation which I had with the clients and we won't fully have here about investment timelines because if you don't match your timeline to the type of investment, it's not investing, it's gambling and the chance that your money's gonna be there when you need it is not great if you have a mismatch. So as we're talking through, they said, well, what are the options while we're waiting to do these renovations? I said, there's not many, two to three years is no kind of investment timeline at all. Then I said, why are you waiting? Is there a reason you're waiting? And they said, well, it doesn't seem responsible to spend all the money at once.

Sara McCullough: (25:50)
And I said, but you can, we agree that you can because you're secure because all of these things are true that we've already talked about as far as your security, your job security, the planning you've already done. And they said, yes, that's true. So for them, that was the biggest thing that I did for them was to talk through their options and say, it's okay to spend it now, if that's what you want to do. So with my clients who are surprised that they have money and money that feels excessive and can move into that feeling overwhelming and shaming, the process there, similar with the smaller amounts of surprise money, is prioritizing what's important to you. So long term and short term, what's important to you? What do you value? What would give you the most joy, the most security, the most anxiety reduction? We're going to go through, talk about what's important to you and prioritize those things.

Sara McCullough: (27:07)
Then we're going to look at the actual math. So had their question been about, do we purely invest or do we spend? I would've given them, um, a scenario of that, right? I would've been able to show them if the money gets invested here, your net worth goes like this. If you spend it, your net worth goes like this. So we're going to prioritize first, then we're going to do the actual math so that as the owner of that money, you can make a clear choice knowing what you didn't choose. Sometimes knowing what you don't choose is as important as understanding what you did choose. So that's where the actual math comes in. There's going to be at least two scenarios, probably more. I'm gonna show that to you. And then the third step in the surprise you have money, is you just do the thing, you do whatever you wanted to do.

Sara McCullough: (28:14)
I had a client, again Josh, we’ll use that, cuz I told you I wasn't gonna be able to remember that I said I was going to do that. Josh called me. This was a number of years ago when I was still managing investments directly for clients. He called and said, I'm thinking about investing some money on my own. I'm just gonna buy a single stock. And I said, really, because that had not been his pattern before, he's actually quite uninterested in investments in general. And I said, what are you thinking? He said, I'm going to, I want to buy Tesla. I want to buy some shares in Tesla because I think it might really go up. I think it's a really exciting company. And then if it does and I make a profit, I could buy a Tesla. I really want a Tesla.

Sara McCullough: (29:11)
And then I said, Josh you could just buy a Tesla. You have enough, you are financially secure. If I take a hundred thousand dollars out of your portfolio right now, in the next five years it's not gonna make a difference. In the next 20 years it's not gonna make a noticeable difference to the point where you have to change your goals. Just buy a Tesla. You don't have to take on the risk of the stock because whether it's a good car or not says nothing about how the stock is going to perform and you don't like stocks, you don't like investments at all; just buy the Tesla. So, sometimes we need to be reminded that you can just do the thing that you want to do.

Sara McCullough: (30:05)
All right. So in this episode, we've covered the importance of understanding that all of your money has a job. You need to understand the job, you need to make sure it's not late for work, you may, you need to make sure it's doing its job in the right place at the right time. And then we've talked a little bit about how to make decisions when you have surprise money. Some of it, a lot of it, one time, multiple times. I really hope that what you've heard running through this episode is that, this is hard. Nobody cares about money in its numerical state. Nobody. We care about what money can do for us. We worry that money can't do what we want it to do or what we need it to do. Sometimes we ask the money to do too many things at once, the money gets confused, we get frustrated. There is a solution to this, it's a really individual solution and I recommend that you get expert objective advice if you truly want to solve that problem. If this has sparked questions for you, that's so great. Ask your questions. I have a blog on my website, the link is in the show notes, and you can ask questions on there. You can contact me directly, but ask your questions.

Sara McCullough: (31:41)
As we make decisions, day to day, we can end up with pieces of our plan scattered all over the place. And from time to time, we need someone who can cut through the noise, someone who not only gets to know you as a person, but can also really show and make sense of your financial plan. Not just the numbers, but truly what the numbers mean for you. This plan that comes from those conversations, it belongs to you, not your planner. I'm Sara McCullough. Thank you for listening to Sara Makes Sense.

Disclaimer: (32:28)
The information in this podcast is intended for general information and illustrative purposes. For advice relevant to your specific situation, meet with a qualified financial planner, lawyer or accountant before making any changes to your situation. Sara's designations and licensing include:  Certified Financial Planner, Registered Financial Planner, Certified Divorce Financial Analyst and holding an insurance license.