We’ve all seen professional athletes and celebrities flaunting large sums of money in their videos as a way to show off all of their hard work. One instance of this phenomenon that comes to mind happened on the Late Late Show with James Corden when James was performing carpool karaoke with the rap group, Migos. In that episode, one of the rappers, Offset, pulls out stacks of cash from a duffle bag and starts posing with them. James Corden is amazed at just how much money he has so he and Quavo begin to count it.
“Two hundred and ten chousing shmousing (sp?) dollars,” Quavo totals the amount of money in his best British accent. If records are accurate, this is a small fraction of their net worth but have you ever stopped to think, “what is the drawback to carrying that much cash?”
Loss or Theft
The obvious answer to the proposed question is you risk losing it or being robbed. In the United States, cash is considered a bearer instrument which means the person who bears it or possess it is the owner of it. Although there are serial numbers on each dollar printed, there is no way to link a dollar bill to an individual person. This is different from a check made payable to you, for example, which could only be cashed by you showing proof of identification.
Additionally by holding cash or keeping it in a non-interest bearing bank account, it may literally be costing you money (that you could be earning if you chose to invest it).
A wise man once told me that nothing works harder than money. What he meant by this is that when money is invested, it is constantly working for you. When you are sleeping, your investments are active. When you are playing, your money is working. When you are done with your 9-5 job, your money works overtime. Money is always working...
Unless you have it in a duffle bag (or anywhere not being invested).
If the Migos invested the $210,000 and received a 7% return for just a year, their $210,000 would be worth $224,700. In this scenario, holding onto that much cash cost them $14,700 in just one year. The effect is multiplied with more money and more time.
Let’s say you are fearful of investing and believe that having your money in a non-interest bearing bank account is the safest option for you. While keeping your money in a bank account is a relatively safe option, it still may be costing. The reason for this can be summed up with one word: inflation.
Inflation is defined as an upward movement in the average level of prices. Each month, the Bureau of Labor Statistics reports on the average level of prices when it releases the Consumer Price Index (CPI). Overtime, prices tend to go up meaning the value of the dollar goes down. Remember when milk was a nickel? Me either but that is because of the effects of inflation.
If the average inflation rate is 2%, $210,000 in a duffle bag would be able to buy about $205,800 worth of things in a year, costing you about $4,200. Again, the effect is even greater with more money and longer durations.
This is a hypothetical example and is not representative of any specific advice or investment. Your results may vary.
Don’t get me wrong, there are good reasons to hold cash but hanging onto too much can be costly. I’d recommend keeping enough money in your day to day checking account to cover your monthly expense for two or three months. You should also have a safety net of cash in a savings account of 3, 6 or 12 months worth of expenses depending on your unique circumstances. Any cash above that should be working for you.
So the next time you see your favorite athlete or musician carrying hundreds of thousands of dollars in a duffle bag, comment “INFLATION!!!” and see if you get their attention.
If you feel that you are holding onto too much cash and feel that it’s costing you, please contact us.
Reggie D. Ford, CPA is the Founder and President of Rosecrete Wealth Management. Rosecrete provides personalized, comprehensive financial services to affluent and high net worth clients. Rosecrete focuses on sports, legal, and medical industries with a passion for helping younger generations with early retirement planning.
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
For a list of states in which I am registered to conduct securities business, visit my website at www.rosecrete.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing includes risk including potential loss of principal.