A 36-year-old makes as much as $130,000 in a day, yet still lives at home. He buys sandwiches late in the afternoon to save 75¢. He organizes his life around commuting only in cheaper, off-peak hours.
Impressive frugality? Or something far more complicated?
That's Navinder Singh Sarao, the trader/skimper who allegedly contributed to the 2010 market “flash crash.” Few of us would go to such lengths to save money. But what if you just keep 20 percent to 30 percent of your assets in cash? Or hold on to an investment you know you should get rid of, but your late father gave it to you and you can’t seem to sell it?
Aren't you being just a little bit eccentric yourself—and losing money in the bargain?
When a positive behavior, such as saving, is taken to an extreme, it can turn into a negative, says Anthony Canale, certified financial planner and author of a paper about financial hoarding in the Journal of Financial Therapy. While people like the ones on the television show Hoarding: Buried Alive have an emotional attachment to physical objects, financial hoarders “develop a similar emotional attachment to cash,” he says, “and eventually feel a real, deep anxiety about letting it go.”
The classic example of financial hoarding: keeping more cash than necessary, even if you’d be better served by paying off debt or investing. Carlos Dias Jr., founder of Excel Tax and Wealth Group, worked with a client who had about $25,000 in her checking account but who nonetheless used a home equity line of credit to make purchases. “She accrued almost $13,000 in debt,” he says. “She had the money [she needed] but kept coining it as a ‘rainy day fund.’ Instead, she created this additional stream of debt.”
While most of America and the world is deeply undersaved, oversavers do exist. When people retire and no more money is coming in, for example, their attitudes about money can change.
Dave Littell, director of the retirement income program at the American College, saw that with his own father. Littell's father had plenty of money, but at age 84 he began to spend down his assets, worried that he would someday be kicked out of his retirement community. Littell encouraged his father to take 15 percent or less of his portfolio and buy a simple joint survivor annuity for him and Littell’s mother. “The annuity was enough to pay his retirement bill every month so he could never get kicked out, and he slept a lot better,” says Littell.
Specific emotional attachments to financial products can also cloud people’s financial judgment. Dias describes a client who maintained an old life insurance policy for sentimental reasons: “It was a hoarding mentality because the policy was from her dad, who passed away. She kept it out of apathy and the memory of the old times.”
When does prudent husbanding of cash cross over into hoarding? “Usually we recommend about six to eight months of expenses in a rainy day fund,” says Canale. “Someone with hoarding behaviors will have over a year’s expenses saved—but won’t be doing anything with it because they’re afraid to invest.” That said, for someone who is self-employed and working in a very volatile industry, there may be good reason for a year-plus cash cushion.
When a client remains truly reluctant to place money in the market, Dias looks for ways they can get better returns but that won’t cause a client much psychological distress. His strategy echoes Littell’s: “Maybe we can go with something that has a fixed interest rate for a number of years [such as an annuity],” he says.
What would Dias do if Navinder Singh Sarao were his client? “I would show him: You have enough money that you don’t have to pinch for a late lunch, you can afford your own apartment. And here are the benefits of that, based on your overall income.” For the moment, Sarao continues to live rent-free, in London’s Wandsworth prison.