Latest / Money Grows on Trees / #346 - Why Keeping OVER This Amount In Your Bank Is A Terrible Mistake

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#346 - Why Keeping OVER This Amount In Your Bank Is A Terrible Mistake · Money Grows on Trees

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  If you've got more than about $30,000 sitting in a savings account right
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  now, you're making one of the most expensive mistakes in personal finance. Most
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  Australians think keeping a big balance in the bank is a responsible, safe
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  thing to do, but the reality is even the best savings accounts in
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  the country are losing you money right now in real terms,
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  and the bigger the balance, the faster it is disappearing. I'm
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  Lloyd J. Ross, seven-figure investor and entrepreneur. And I've helped thousands of everyday Australians,
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  Americans, New Zealanders, and Canadians get out of debt and build real wealth. And in this video, I'm
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  going to show you the exact formula for how you should actually approach
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  keeping money in the bank. The four cash straps rank from
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  bad to catastrophic, and where every dollar above that
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  line should live instead. So firstly, why are your savings shrinking?
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  The math step-by-step is this. The best ongoing
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  saving rates right now are about 4.8 to 5.3%, depending
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  on bonuses. The cash rate at the RBA is 4.35%. Interest
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  is taxed at your marginal tax rate. So let's say it's
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  35%, middle bracket range. The 5% interest gives
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  you about 3.2% net. Inflation at 3.7%, on top of that, is forecast to hit at about 4 to
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  4.5%. So the net result on $100,000 is roughly negative $1,500 a
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  year in real terms. So negative 1.5%. So in
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  a big four standard account, at 2.1%, it's closer to $3,000 a year gone from taxes
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  and inflation. In a transaction account at 0%, through
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  inflation, It's
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  negative $4,800. Yes, you're
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  losing money and purchasing power if it's in an
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  account that has 0% interest. As the balance rises, the
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  purchasing power falls. It's the only theft
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  where the victim checks the app and feels good about it. Why
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  most people do even worse than the math. Here's the thing, 56% of
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  savers miss their bonus conditions in that account in any
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  given month. So what can be a higher rate is actually usually
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  a 0% rate for that particular month. Almost half of
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  Australians, 47% in fact, don't even know if their rate
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  beats inflation. So half Australians don't even know. Half
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  probably don't even know what inflation is. So here are the four
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  cash traps ranked for your education. Trap
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  one, the transaction account graveyard. Money in
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  your everyday account earns 0%. That's full inflation
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  melt. 4.8% in real purchasing power terms
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  gone. And reality is, I think it's a lot higher than that. So transaction accounts
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  are to hold one month's spending and nothing more. Trap
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  two, the loyalty tax. The big four standard rates, 2.1%, while
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  the best pay 5% on 50K plus. So
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  staying loyal to a particular bank can be very costly. Your bank's
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  reward for 15 years of loyalty is actually charging you for it.
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  I'm gonna write that down for myself. The
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  third one, the bonus condition mirage. So they advertise 5.3 as
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  I said, and that's what ING is doing right now. Minimum deposit, no withdrawals, five
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  card transactions, blah, blah, blah. But you miss one and you point one. So
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  over half the people miss. So if you can't reliably meet the hoops
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  that they give you to jump through, then you don't get any more and it
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  costs you money. And then trap four, the $250,000 cliff,
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  right? So the government's financial claim scheme guarantees deposits
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  of up to $250,000 per person per bank. That
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  means if the bank melted down and went broke, the government will
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  guarantee to give you $250,000, okay? Above
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  that in one institution at a time, of course, if you're the unsecured creditor,
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  so you've got no security behind that. So anything above that becomes not
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  actually protected by all accounts. So what should
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  you actually keep in your bank? Well, this is the answer to
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  the title of this episode. And it's really a
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  formula. It's a formula of your cash line equals A plus
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  B plus C. So what are A plus B plus C?
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  A is your emergency buffer, three to six months
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  of essential expenses. So if you've got a stable job and
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  dependents and so forth, it takes about three months to
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  get your job back, right? So six months if you've got kids and
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  dependents, so three to six months of your income is
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  for emergency buffer, that's A. B is known costs
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  inside 24 months. So for example, if you've got a house deposit
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  you'll use, if you've got cars, weddings coming up, tax
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  plan, plan surgery, blah, blah, blah. So it's called long-term spending. So
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  money with a date on it, it stays in cash, full stop. So for example,
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  if you've got a holiday coming up, you can keep that in your account, or if
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  you've got a deposit for it, keep that in your account, but it doesn't have to go
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  into high interest, it can just stay in your active account, okay? That's
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  B. And then C is sleep at night margin. One
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  extra month, if volatility generally like stresses people out, so it's like
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  a piece of mind money, so it's worth a lot more than
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  just the money sitting in the account. So it's A plus B, plus
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  C. Just quickly, if you're ready to take control of your finances but feel
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  stuck on where to start, I have a solution. My book, Money
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  Buys Happiness, simplifies investing and wealth building with
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  practical steps to help you achieve financial peace. Get
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  your copy via the link in the show notes and let's get your money working for
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  you. Now back to the episode. So let's go through an example, right? Essential
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  expenses, $5,000 a month. That's what you're typically spending.
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  So $15,000 is A. And then B is
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  if you've got long-term spending coming up. If there happens to be none,
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  it's zero. So you've got none, it's zero. So that's fine. And
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  then margin of save, $5,000. So your actual cash
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  in your account is probably to the tune of about $20,000. That's it.
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  It's unemployed money that's losing between, say,
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  3% and 4.5% a year in real terms before any tax on
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  the interest. So if your money were an employee, you'd
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  have fired the cash years ago because it's not producing. It
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  shows up, it just does nothing. In fact, it actually shrinks. So
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  where the buffer itself lives is if you do
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  happen to have a mortgage and you've got an offset account that beats the savings
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  account, sit your emergency buffer and your emergency fund, your A
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  plus B plus C inside that offset account because you
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  might be able to earn 6.5% on that tax-free with no conditions, no cap. And
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  this alone is worth thousands of dollars a year. That's smart so
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  long as you don't spend it. Secondly, if
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  you have no mortgage, then you wanna make sure you can find an
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  everyday accessible account that rewards you keeping the money in there. And
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  you can get up to about four to four and a half percent on that, and that's a good place
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  to keep it so long as you can access it straight away. And over the $250,000 total
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  cash for a legit reason, you can simply split that across different
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  banks. If you've got more than that, you can open a separate bank account, split it, or
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  you can have your spouse have their part and you can split it in people, not
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  just bank accounts. Does that make sense? And that's how you prepare
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  and handle your cash. Everything beyond that.
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  Where does it go? Where does the excess cash go? Well,
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  the most important thing to do if you haven't done it yet is kill any debt
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  that's costing you above 8%. Because it's
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  very difficult to get 8% consistently in the market over long periods of time, certainly
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  anything above 10%. So credit cards are 20% kill
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  them. Second thing, any offset. So like, for example,
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  if you've got the ability to sit into a mortgage account, even
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  excess above the emergency fund sit in there too. For example, we
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  have offset accounts against our laundromat business, where the loan interest
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  rate is about eight and a half percent. And any free cashflow and working capital
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  we have in excess of what we need beyond our buffer, I sit it
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  in those accounts because it generates an 8.5% return. Rung
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  three, super. If you have extra and you can put more into your superannuation,
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  it's not a bad place because you get taxed at 15% on the way in and no capital
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  gains tax on the way out. Rung four, the two fund portfolio. It
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  is effective to dollar cost average excess funds over time
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  into a long run ETF, like the S&P 500 as an example, that
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  can give you long term 10% returns roughly, which has done for
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  a long period of time. Not average every single year, it's up and down, but
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  long term, it's a better place for your money than zero, without a
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  doubt, as long as you understand it. If you don't understand it, get
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  educated, all right? Rung five, deploy towards income
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  producing assets. So beyond starting your portfolio, then it's
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  like, wow, we have a lot more this year. Well, can you build
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  a business? Can you buy a business? Can you form a partnership? Where can you deploy that
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  capital into a small business to either buy it or build it? And so you can generate even
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  more cash flow. Okay, so the whole idea is to start paying
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  off debt, move it into offset accounts, and
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  then beyond that, move it into an index fund of some sort to generate more capital, return
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  on capital, and then into businesses to generate even more return on capital. So
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  the idea of cash is to put it to work in each one of those segments there
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  that generates far more return than just zero or negative from inflation. Okay,
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  does that make sense? So it's just common sense deployment
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  of capital that's going to help you build wealth over time. So
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  the crux of this is cash is not bad, it's just where it's deployed and
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  held and how much of it, right? So to summarize, three to six months of essentials, that's
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  A, anything inside 24 months of long term spending is B, and
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  then one month of margin is C. It's A plus B plus C will
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  help you deploy the cash where you need it, and then deploy the
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  extra excess into those areas that I mentioned to beat inflation. And
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  remember, you only guaranteed up to $250,000 in a bank per
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  person per bank account at a time. So if you want to spread that risk over
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  a large cash position, you can. But of course, if it's in a big cash in
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  an account, and it's not deployed into assets, I think you're probably making the mistake of
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  your life there. The most important thing, though, is to make
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  sure you have enough cash, but not too much that it costs you money.
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  Because inflation right now is critically killing a
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  lot of money and purchasing power in this country. And the banks are
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  counting on you never understanding that, never doing the math, right?
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  So here's your fix. Calculate your cash, do the A plus B
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  plus C and start deploying your cash into other assets because
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  the biggest risk you can take if you've got a lot of cash is to sit in an account that's
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  got zero. It's destroying your wealth every single day.
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  So if you've enjoyed this episode, you've got some value from this, hit the subscribe button. Leave
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  me a comment below. Leave me a question below in the comments. I'll come back and talk to you in there. And
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