05 November 2021

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You never know

Author: Luigi Campopiano

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Not even the pandemic and the lockdown have been able to limit the excessive growth of the mountain of money left to lie in the current bank accounts by small investors. The problem, however, is not the quantification of this enormous mass of money, but its raison d'etre: that there is all that money stuck in current accounts, at zero rates and, possibly, at the risk of Bail-in, Equity, and inflation effect?

In the logic of financial planning, the money in the current account should only serve treasury purposes; shopping, going to a restaurant and covering any extra costs during the month. The rest should be invested to achieve its objectives, according to the dictates of goal-based investing. If you ask investors why they keep so much money in their checking account, the answer is almost unambiguous: "You never know".

Money can have a preventive function, but the more than 1,000 billion present on the current accounts for a "You never know" appear excessive. How can we try to set this money in motion and make it productive? Money must be given a name and, in this case, it will therefore be a question of giving a name to "You never know". The uncertainty that grips account holders can be reduced to some macro-categories: let's try to consider this regard.

1. Unexpected events relating to the person: if I get sick? What if I have to be treated? Etc. These are typical fears but, if we try to reason, it is easy to understand that you certainly don't need to have some extra money in your checking account to face certain situations. Such eventualities must be covered with ad hoc insurance products. In this regard, however, it should be noted that insurance coverage could appear expensive for the investor and not be adequately appreciated as an ideal solution. The convenience of hedging will have to be compared with the risk, and the cost, of not hedging (leveraging emotions);

2. Unforeseen Employment Situations: The pandemic has taught us that a person's earned income can drastically reduce quickly if not zero. And if the income from work fails, a family's standard of living also falls. What to do then? At first glance, the most logical answer for a saver would seem to be to keep some money in the current account (having a small treasure to deal with an unexpected reduction in income from work is healthy and right). However, it is disputable that this treasury must be kept entirely in a current account (the return is negative net of costs). The financial consultant must study an optimal allocation of the resources placed in reserve, preferring investments that can be easily dismantled but also dosing a little risk to obtain an acceptable minimum return. This little treasure may not become necessary over time. Furthermore, the hypothesis that this treasury can be used as a guarantee to obtain a temporary credit should not be ruled out;

3. Unforeseen events relating to assets: someone may fear that their assets will be attacked somehow or become impoverished due to negative events (creditors take my house away, a bolt of lightning falls on my roof, etc.). Again, holding money in the checking account makes little sense. Here we need legal instruments to protect assets or cover insurance products;

4. Unforeseen expenses of no small importance: it is necessary to distinguish these expenses according to their amount. Here are two examples. A family has an average standard of living of 4,000 euros per month, and it may happen that a month the family has to spend a little more, let's say 5,000 euros. This increase in costs can be covered with a small reserve on the current account and/or by increasing the credit card limit. If, on the other hand, we think about unexpected expenses of a non-minimal entity, then the holding of financial resources on the account, once again, loses its logical and financial sense. Holding 30,000 euros in the account to change the car in the event of an unexpected accident is not an optimal solution because it will be possible to decide whether to disinvest part of the investments, take out a personal loan, opt for a leasing solution, etc.

In conclusion, if we think on a more rational and less emotional level, the real and good reasons for holding excessive liquidity in the current account are reduced to a flicker. It is not easy to change the mentality of investors/savers, but trying is a must.