The Money Decision That Will Stop You From Getting Rich

It took me like 20 years to figure this out

I’m a junkyard full of false starts

— Elliott Smith

Over 20 years, I have opened and closed upwards of a dozen investment accounts. I reversed course and sold everything repeatedly because I needed — or felt I needed — the cash.

This is tantamount to financial suicide. Investing doesn’t work out well if you do it in fits and starts. You must make regular contributions over time, preferably in stocks that pay dividends, to realize the power of compounding. It doesn’t matter what the stock market’s doing. If it’s up, down, soaring, or crashing, stay the course. Keep buying — methodically.

Don’t do the financial equivalent of the walk of shame like I have done so many times. It set me back 20 years. Luckily, I got myself back on track.

Exactly what did I do to right myself?

I started saving — not investing — way more cash than the experts recommend. And I altered my investment strategy for purely psychological reasons.

Cash is King — Don’t Let Anyone Tell You Otherwise

I keep at least ten times my monthly living expenses saved in cash.

I don’t give advice when I write. I relay my experiences and preferences. However, if I’m going to give advice, this is it. I think you should do likewise.

So, if your monthly expenses are $2,500 (like mine), keep a minimum of $25,000 in cash on hand before you invest a dollar. And don’t keep it all in an emergency fund. I’ll explain how to allocate it later, but first consider my rationale.

The Financial Walk of Shame

The great Tim Denning got me thinking about this.

On May 13, 2020, Tim published an excellent article explaining inflation and arguing in favor of investing your money over saving it:

“Every minute you save money is another minute inflation is eating away at you, and the time and effort you spent to earn it. Why work really hard and then have your money be devalued? It doesn’t make any sense. It’s madness.”

The purchasing power of money declines over time as the general cost of goods and services increase. In five years, it might cost you $1.10 to buy what you could have bought for $1.00 today. So, in theory, it doesn’t make sense to keep your money in savings. You can only outpace inflation by investing your money at a rate of return that exceeds the rising cost of consumption.

Sounds sane and logical. Except it’s not. Because it disregards the reality — practical and emotional — of day-to-day life in the trenches, on the ground.

On July 29, 2020, Tim published another article detailing his rationale for selling his entire investment portfolio:

“…I’m out of the markets for the foreseeable future. This current environment reeks of 2008 and the tech bubble all over again. History is never the same but it sure as hell rhymes.

So I’m sitting in cash. I’ve made 30% off the portfolio recently, and it’s time to sit back and relax for a bit…

Investing is a mental game.

Every day I wake up with extra stress I don’t need.”

I’m not picking on Tim. I love him. I have done exactly what he did — in some form — so many times. I sold due to fear. Because I, too, felt the need to retreat to the comfort of cash. I sold because I felt stress associated with investing.

It’s the absolute worst move you can make. Two factors lead many of us make this wealth-crushing decision repeatedly:

• We started investing too soon.
• We don’t use an investing style that mitigates risk, thus reducing stress.

Ample Cash = Peace of Mind

Tim sold his investments and went to cash because, despite inflation concerns, being in cash provides psychological comfort and peace of mind.

I can’t speak for Tim, but I have finally, after about 20 years, zeroed in on why I put myself in the same self-defeating position time and time again.

I didn’t give myself an adequate cash cushion. Instead of having money at the ready (liquidity) to meet all of my basic needs and most primal desires, I kept it sitting in a seemingly faraway place — the stock market.

If I needed money, it would take 3–to-4 business days for stock to convert to cash and hit my bank account. That scared the hell out of me. So much so that I got into the habit of investing for a few months, then selling so I could see cold, hard cash, accessible with the swipe of a debit card, in my bank account.

It took awhile, but I finally realized I was sabotaging my ability to build wealth. I rendered myself financially impotent. I had no plan, no true strategy to not only make money in the long run, but effectively manage it now.

So I decided to eschew expert advice and quit investing — completely — while I took control of my cash situation. Operating from a position of strength with respect to cash helped improve my emotional relationship with money — whether I’m spending, saving, or investing it. We’re on good terms now.

I use a simple strategy to methodically allocate my cash flow into pots of money:

• Subsistence fund: A checking account with two months of living expenses — fixed and discretionary.
• Emergency fund: A savings account with four months of living expenses that I don’t touch — ever. An emergency fund only exists to cover periods of reduced income.
• Additional funds: Savings accounts to fund things I need/want to do in the next 6-to-12 months. Right now, I have one — a fund to cover the entire cost of moving from Los Angeles to Portland.
• Temporary retirement fund: An always growing savings account earmarked for periods when I want to work less or not at all. This fund exists so I don’t have to tap my subsistence or emergency funds to cover temporary retirement.

With these pots of money fully stocked, I give myself the green light to start investing again. Because, with ample cash on hand, you worry less about market volatility. I employ an investing strategy that minimizes stress and focuses on generating income over the long-term. I’m less likely to waver.

Investing So I Won’t Quit

Here’s the deal — I might be letting inflation beat me to some degree. But I’m fine taking this relatively small loss. I have lost way more money by jumping in and out of my investments. So, now, instead of stressing myself out with a portfolio of high-flying tech stocks, I take a defensive, but still lucrative approach to investing.

I detail it in a recent Medium article.

In the shell of a nut, I strictly adhere to a style known as dividend growth investing.

By keeping more than enough cash in my bank accounts to meet all of my needs — and then some — for the next year or so, I feel more comfortable putting all of the money I have left over each month into the stock market.

Will my cash buy less down the road than it buys today? Possibly. Though, the U.S. could enter a prolonged period of deflation, particularly if the Fed stops propping up the economy. Either way, I’m willing to accept the prospect that the dollar I save today will not be worth as much as the dollar hold tomorrow.

As I do life, macro economic concepts don’t impact my reality nearly as much as my mental state. Cash, as it did for Tim when he sold his investments, provides peace of mind. And it allows me to stay the course in my stock portfolio. As you’ll discover if you investigate my investing strategy, the worst thing you can do in a portfolio focused on compounding income is sell. In any portfolio, selling on panic, almost always, proves to be a poor choice. Worse than succumbing a few bucks to inflationary fears.

Don’t put the cart before the horse. Budget and save — comprehensively and thoughtfully — before you put a dollar — whatever it’s worth — into the stock market or other investments.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.