I have a confession. I am not financially perfect. Many “financial professionals” aren’t either. You just look at Wall Street to see how many “pros” make mistakes – often big ones. But I want to come clean on a common mistake I recently made, and one I see my clients make often. Sometimes savings doesn’t make good cents.
I took out a business loan in December 2010 for $7,500.00 with an interest rate of 7.5% . When I received the money, I socked it away in a traditional savings account paying a measly 1% (sad, but standard). Sure there are other higher yielding investment vehicles, but it was important for me to keep this cash liquid. My goal for this loan was simple: bridge the “cashflow gap” or the time it takes a client to pay from the time the work is performed.
I decided to crunch the numbers and figure out how much it was costing me to “save” that money each month. On average my loan’s monthly interest charge has been $42.76. On average my monthly income from that savings account has been $4.64. So basically it is costing me $38.12 to “save” that money each month.
It’s an instance of “Savings is Stupid”. Instead of using some of the “savings” to pay down the balance on the loan, and lowering my monthly interest expense, I have “hoarding” the money because of fear. I am afraid to let go of my “savings” even though it is COSTING me money.
I have had clients that have 6 figure savings accounts and owe a measly few thousand in credit card debt. Letting go of any money in “savings” is connected to some highly-charged, emotional stuff. Getting clients (okay….myself) to realize it is okay, perhaps even smart, to pay off smaller debts while still maintaining a health savings account can be a good move.
This choice will not be for everyone, and please consultant with your financial team before making any major financial decisions. I do however implore you to look at both your savings and your debt balances and see how things might shift for you if you shift some money around. As for me? I cut a $1,500 check today. I am not ready to empty that savings account because clients defaulting is always a real “business threat” and I have employees to pay. I am however ready to trust a bit more, while saving more on those monthly interest charges.
