You Have Too Much Cash and It’s Costing You Money

Dan Ariely, a professor of Behavioral Economics at Duke University, says that studies show that when people pay off loans, they pay off the small loans first rather than the loans with the highest interest rate. Studies also show that even when people have debt, they keep a lot of cash. Both of these in combination cost people a lot of money that could be saved if they thought more rationally.

Ariely also believes that the cell phone may be our financial salvation. Through apps that tell you the cost of the item you are purchasing in terms of the cost of your favorite things, and ones where you you pose a financial question and the people that you trust most give you their answers, these typ

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7 Responses to You Have Too Much Cash and It’s Costing You Money

  1. eden says:

    I”m confused about “even when people have debt, they keep a lot of cash” necessarily being a bad thing. We’re in the process of paying off our debt and we do have a significant amount of cash on hand – in our emergency fund and our savings account earmarked for large purchases to prevent us from taking on more debt in the future.

  2. I think this is a false statement. People with a lot of consumer debt aren’t swimming in cash.

    Second, having a boatload of cash costs me nothing. It earns me a 4% risk free yield every year!

  3. crazyliblady says:

    Have you read any of Dave Ramsey’s books? He advocates beginning by being current on regular bills (utility, rent, etc.) and cutting the fat out of the budget. He adds to that building up an emergency fund of $1000 in order to pay Murphy when he comes calling. I have built up my fund up to $1000 several times only to have to make a car repair or something. If I had not had that money on hand, I wouldn’t have been able to make those repair and handle emergencies. Or, if I had gotten the repairs, I would have only added to my credit card debt. If you have an emergency fund where you can easily access it, taking care of the problem is much easier and less stressful. How about if you have to take your kid to the ER and pay a $75.00 copay? What if you had to replace a roof or an appliance? What would suggest people do, go into more credit card debt? If so, you are either really blind to reality or have never been in any serious amount of debt.

  4. Rick says:

    Theory verses real life.
    In theory it makes more sense to pay off your loans. In real life, you’d better hve some money on the sidelines. In today’s economy,you cannot count on those credit lines being there when you really need them.

  5. Broken Arrow says:

    Well, Jeffrey, it’s like that lowest balance versus the highest interest debate that has been around on SA years ago, and is probably still raging elsewhere today.

    No real right or wrong answers, I think, and most people are likely to do a bit of both depending on what it is. And in this day and age, anything method is fine as at least it’s financial progress.

    But for what it’s worth, I took the highest interest route, and never regretted it.

  6. EF Cussins says:

    In our family, we pass out a cash allowance to each member. That is there runs to Mc Donald’s and soda’s. The other household spending with debit card or check.

    This works good most of the time, except for the occasional run to the local drug store for cold medicine.

  7. Jackie says:

    There is, of course, a balance to keep in mind. If you have high interest debt (cc debt usually), you shouldn’t work so hard on having more emergency savings than you need. Some people get so caught up in the “pay yourself first” thinking that they do accumulate too much cash and cost themselves more money while paying off debt.

    Several years ago I was paying off some CC debt and a friend of mine at work was appalled that I didn’t have more money in savings…. until I explained to him that it didn’t make sense to pay 15% int on my cc debt to make .01% int on my savings. I had enough saved to see me through emergencies, though anything long-term would have added more debt. This is where luck intersected with skill – I was making efforts to become CC debt free and I was lucky enough not to have a financial catastrophe drop me back to square one.

    Also, I have to introduce some soft science into the equation of paying off debt. Yes, it makes more financial sense to pay off the highest interest rate balance first. BUT, sometimes you also need that boost of confidence and satisfaction of having paid off anything at all in order to maintain momentum. Better to rack up more interest for a few months and still remain on track to erase debts than to lose momentum and stop paying off debt altogether.

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