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Partly this is due to households who are financially well-situated having options for smoothing out transient cashflow issues which are superior to keeping larg

by patio11 13y ago

Partly this is due to households who are financially well-situated having options for smoothing out transient cashflow issues which are superior to keeping large amounts of cash in non-productive accounts. Depending on your risk tolerance, if you're a millionaire, having $1k in checking might not be quite as insane as people writing personal finance advice for Americans with $30k annual incomes would make it out to be. (Most folks with $30k annual incomes don't have $100k available on plastic or the ability to have $30k wired from their brokerage to checking within an hour of asking for it.)

muzz 13y ago
this may be a nit, but unless the $30k is in a cash-equivalent like money market wouldn't you have to wait 3 days for settlement of whatever was sold for that $30k?
- patio11 13y ago
  It depends on a bunch of factors. For the type of folks I'm imagining, that won't be a problem for them. Think "margin." Not only do they not need to wait 3 days to receive the $30k they might never have to sell anything for it at all.
- adventured 13y ago
  A lot of brokerages will hook banking features up to your trading account, such that "checking" and "trading" essentially become just two parts of that account like "savings" and "checking" are for most standard bank accounts. You do typically still have to wait X time for settlement, but if you have margin or cash in your main account (which can also be put into action trading immediately), you can tap into that via a checkcard or similar.
maxerickson 13y ago
The Brookings paper is extremely wonkish, but their medians (among the 'wealthy hand to mouth') are wealth less than $100,000 and more than 50% of it as housing.
- ghaff 13y ago
  As you say it's very wonkish and it's hard for me, after a relatively quick skim, to see how they're defining "liquid" and so forth. Now, it's easy for me to believe that there are indeed middle-class (because that's how "wealthy" seems to be defined in this paper) households who have bought more house than they can really afford which, combined with educational and other expenses, means that they are really living paycheck to paycheck. I can also imagine many other such households who don't hold a whole lot of cash or money markets but who have a combination of HELOCs, diversified stock and bond mutual funds, and so forth which give them a significant amount of buffer without resorting to liquidating retirement accounts. It's not clear from my read how such a household would be defined for the purposes of this paper.
  - maxerickson 13y ago
    They spell out the categories in 4.6 (page 22-23 or so). I can believe there is a degree of financial security associated with having ~ 1 paycheck worth of cash sitting around (if I read it right, their cutoff is something like 1/2 a paycheck). An easy to imagine example is a new home buyer that reached a little bit, at first they are going to be spending most of their paycheck, but at some point things will tip and they will have a lot more flexibility.
    - ghaff 13y ago
      Ah, OK. That's a bit broader then. I think it's fair that a first-time homeowner has liquidated their stocks and so forth for a down payment and other costs related to setting up house. It's also fair to say that the same homeowner five years out really ought to have some savings given that they don't have a lot of home equity yet.
larrys 13y ago
Would add to your point that having money also allows you to paper over any mistakes that you make using the above strategy. I was discussing this with my wife with respect to a vacation that we are taking. After noting that the airline (which we booked months in advance) rejigged the flight and we had to pay extra for seats in better locations on the plane, I said "how about next time we wait until the last minute (or week before) and book the trip?" My bet is that by waiting we will save money with both the hotel and the airplane. I could be wrong of course. But my point is that if I bet wrong I can easily cover the extra cost of both items. So I can afford to take the risk whereas someone not in the same financial situation can't afford to do that or it might have a bigger impact on them.
ajb 13y ago
See also http://en.wikipedia.org/wiki/The_Million_Pound_Note http://en.wikipedia.org/wiki/The_Million_Pound_Note https://www.youtube.com/watch?v=kG2rWWIc1SE https://www.youtube.com/watch?v=kG2rWWIc1SE

by patio11 13y ago

muzz 13y ago

this may be a nit, but unless the $30k is in a cash-equivalent like money market wouldn't you have to wait 3 days for settlement of whatever was sold for that $30k?

patio11 13y ago
It depends on a bunch of factors. For the type of folks I'm imagining, that won't be a problem for them. Think "margin." Not only do they not need to wait 3 days to receive the $30k they might never have to sell anything for it at all.
adventured 13y ago
A lot of brokerages will hook banking features up to your trading account, such that "checking" and "trading" essentially become just two parts of that account like "savings" and "checking" are for most standard bank accounts. You do typically still have to wait X time for settlement, but if you have margin or cash in your main account (which can also be put into action trading immediately), you can tap into that via a checkcard or similar.

maxerickson 13y ago

The Brookings paper is extremely wonkish, but their medians (among the 'wealthy hand to mouth') are wealth less than $100,000 and more than 50% of it as housing.

ghaff 13y ago
As you say it's very wonkish and it's hard for me, after a relatively quick skim, to see how they're defining "liquid" and so forth. Now, it's easy for me to believe that there are indeed middle-class (because that's how "wealthy" seems to be defined in this paper) households who have bought more house than they can really afford which, combined with educational and other expenses, means that they are really living paycheck to paycheck. I can also imagine many other such households who don't hold a whole lot of cash or money markets but who have a combination of HELOCs, diversified stock and bond mutual funds, and so forth which give them a significant amount of buffer without resorting to liquidating retirement accounts. It's not clear from my read how such a household would be defined for the purposes of this paper.
- maxerickson 13y ago
  They spell out the categories in 4.6 (page 22-23 or so). I can believe there is a degree of financial security associated with having ~ 1 paycheck worth of cash sitting around (if I read it right, their cutoff is something like 1/2 a paycheck). An easy to imagine example is a new home buyer that reached a little bit, at first they are going to be spending most of their paycheck, but at some point things will tip and they will have a lot more flexibility.
  - ghaff 13y ago
    Ah, OK. That's a bit broader then. I think it's fair that a first-time homeowner has liquidated their stocks and so forth for a down payment and other costs related to setting up house. It's also fair to say that the same homeowner five years out really ought to have some savings given that they don't have a lot of home equity yet.

larrys 13y ago

Would add to your point that having money also allows you to paper over any mistakes that you make using the above strategy. I was discussing this with my wife with respect to a vacation that we are taking. After noting that the airline (which we booked months in advance) rejigged the flight and we had to pay extra for seats in better locations on the plane, I said "how about next time we wait until the last minute (or week before) and book the trip?" My bet is that by waiting we will save money with both the hotel and the airplane. I could be wrong of course. But my point is that if I bet wrong I can easily cover the extra cost of both items. So I can afford to take the risk whereas someone not in the same financial situation can't afford to do that or it might have a bigger impact on them.

ajb 13y ago

See also http://en.wikipedia.org/wiki/The_Million_Pound_Note http://en.wikipedia.org/wiki/The_Million_Pound_Note https://www.youtube.com/watch?v=kG2rWWIc1SE https://www.youtube.com/watch?v=kG2rWWIc1SE