————————————————————————————————————————
Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!
————————————————————————————————————————
Click here to enter my free $79.07 giveaway for a chance to win 5% of My Personal Finance Journey blog income and give another 5% to a charity of your choosing! Deadline to enter is September 30th, 2012.
The following is a post by MPFJ staff writer, SK. SK writes about the reasons we get into debt, changing the patterns that get us into debt, and examines small business ownership and real estate investing at her blog, American Debt Project. Please welcome her to the MPFJ family!
How Much of Your Net Worth Should be Sitting in Cash or Low-Interest Savings Accounts?
Even though your net worth is a pretty simple equation (Assets minus liabilities = net worth), exactly what is the breakdown of those assets? And, is there a magic ratio you need to follow? Like everything else in personal finance, the answer really depends on your situation. To hear rappers tell it, your assets should be spread out as follows:
Assume: $1 million net worth
- $250,000 in diamonds and platinum from Jacob the Jeweler
- $100,000 in equity in overpriced Los Angeles/Atlanta/New York McMansion
- $400,000 in Lamborghinis, Maseratis and vehicles for entourage
- $50,000 in investments in other rappers and own record label
- $200,000 cash on hand because it ain’t flauntin’ if you got it
Another extreme example of poor asset selection could be a Dave Ramsey devotee:
Assume: $100,000 net worth
- $60,000 equity in house that is almost paid in full due to Dave Ramsey’s advice
- $5,000 in Roth IRA invested in mutual funds as recommended by Dave Ramsey’s endorsed local providers
- $40,000 earning 0.65% interest in an online savings account for an emergency fund which covers 12 months of living expenses
Call me crazy, but even though the rapper has made some pretty ridiculous investments that make up his total net worth, he still gets points ahead of the Dave Ramsey guy for only having 20% of his net worth in cash versus 40%. It sounds appealing to have 3 (or 6 or 12) months’ worth of living expenses in reserve, but that money should be working for you. Sitting in cash or a less than 1% interest-earning bank account means your money is not even keeping pace with inflation. Consider adding to your cash savings slowly as you invest in other options first. Cover a month of living expenses and then contribute to retirement accounts like a SARSEP or 401(k) to reduce your tax liability. Or pay down any debt that you have, especially anything with more than a 6% interest rate.
At the moment, I’m focused on just paying off my high-interest debt. I save money with every paycheck or side job, and then use large chunks of that to pay down debt. When I am out of debt, I don’t plan to hold more than 10% of my net worth in cash/easily accessible savings. As my net worth increases, that percentage will go down, since I don’t have an extremely risky career (like a rapper) and haven’t built a criminal empire that might require me to flee at any minute and be able to secure hoards of cash in a moment’s notice (like Chapo Guzman). So, if you’ve been diligent about saving and find yourself holding onto a lot of your net worth in the form of cold, hard cash, start considering investments that can give you a better return on a good portion of that cash.
How about you all? What percentage of your net worth do you feel should be held in very liquid accounts (savings, money market, etc)?
Share your experiences by commenting below!
