Cash Management Is Really All About Stress Management

Cash management is really all about stress managementAt any given time, every investor must always decide three things:

1) How to invest their new cash flow

2) How to invest their existing cash

3) How to reposition their existing investments if at all

As long as enough money is coming in to cover your expenses, life is fairly good. As our cash hoard grows, there’s also less financial stress because you can more easily cover unanticipated emergencies like a furlough.

In general, having 6 – 12 months of living expenses in cash or cash equivalents is good enough for the average person to sleep soundly.

There might come a point, however, when you will have excess cash. Perhaps you were undisciplined in your monthly dollar cost averaging strategy or maybe you got a bigger windfall than anticipated.

Whatever the case may be, your financial anxiety will be replaced with the fear of missing out on potentially bigger gains in risk assets like stocks and real estate. Given your peers are all getting rich, you will want to follow suit.

If enough greed kicks in, you will end up taking on more risk than you can comfortably withstand, and sometimes bad things will happen. Your financial stress returns once again. Hence, one benefit of following Financial SEER.

No matter how much money you have or how much you make, you will always have to work on managing your financial stress. After all, the more money you have, the more you have to lose! When you are broke, you’ve only got upside.

Money is mental. Psychology is why during market sell-offs, there will be headlines about stocks re-testing Great Depression lows. And during bull runs, there will be headlines about how the sky is the limit and you just can’t lose.

I didn’t do much right financially in 2018 except for continuing to aggressively save. But I did make one move with my existing savings that helped reduce financial stress. 

Managing Stress Through Savings

Back in early 2018, I was getting nervous about the stock market. We’d seen an almost 10% pullback in February that jolted me awake. Ever since I left my day job in 2012, I’d been regularly plowing the majority of my cash flow into the stock market and San Francisco real estate market.

After all, my #1 goal is to earn enough passive income so neither my wife or I have to go back to work. With the likelihood of private school expenses coming up in 2022, we have a goal of earning at least $250,000 a year in passive income to stay jobless.

When the correction hit in February 2018, I realized my risk exposure was too high for my comfort. As a result, I slowly started reducing my stock allocation from 70% to 52% as stocks recovered into the summer.

But when you reduce your stock exposure during a rising market, you begin to question your decision because you start getting greedy. You start imagining whether you’re missing out on more gains by being too conservative. I was tempted to take on more risk again.

But when I got an e-mail from CIT Bank that they had raised their money market rate to 1.85% and their 12-month CD rate to 2.25%, I beat back my greed. Just a year earlier, money market rates averaged well below 1%. I still remember only receiving a 0.1% money market rate circa 2015.

1.85% for a money market rate and 2.25% for a 12-month CD rate seemed pretty good. As a result, I decided to lock in a 2.25% guaranteed return for 12 months on July 16, 2018, instead of investing the money in the S&P 500 or the forever tempting FAANG stocks, which I was already heavily overweight, given I live in San Francisco.

As soon as I bought the 12-month CD, I felt a sense of relief. I remember thinking to myself, “Ah hah! Nobody can take away my money now!” I felt my stress melt away as I could now focus on more enjoyable things in life.

Although I’m only earning about ~$190 a month in interest income, it feels wonderful to know my money is secure. Because I generate excess cash flow every month, I constantly have to figure out where to invest the money in order to at least keep up with inflation.

Locking up money in long-term private investments or illiquid investments like real estate enables me to stop worrying so much about how to reinvest my cash flow. 

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