Finance

Overcoming The Illusion of Wealth

It’s my favorite time of the year! Spring? Kind of, but I’m really talking about annual bonus and merit time! My employer has a fiscal year that is different from the calendar year so our bonus paid out only recently. The only problem with a generous bonus is this illusion that I now have wealth.

I’m really not complaining. During my 18 years in the workforce since college, there have been plenty of years where the company/organization I was working for didn’t pay out any bonus or give merit raises. I’ve heard the “times are tough” talk more than I’d like to admit. Instead, this is purely my own psychological barrier that I need to overcome.

Shortly before bonuses are paid out, we’re notified of the estimated amount, based on corporate metrics. From there, I calculate what mine will be after taxes. The prospect of so many thousands of dollars ending up in my account on a certain date is exciting to say the least. I’m not money-hungry by any means, but you have to admit it’s fun to think of the possibilities that come with so much money.

This year, I decided months ago that I’d put most of it into my savings account. I’d created a cash flow analysis to determine how much I need to save each year from now until I’m 50 (2026) so that I’d have enough in cash for early retirement, less some big house expenses (appliances, flooring, etc) that I’m anticipating within the next 9 years.

With so much of my bonus transferred to savings, there wasn’t much left. In my April expenses post I talked about how I used the rest to buy a new fridge, as well as a few other things, and also donate a portion to various organizations. But I’m quickly reminded why I don’t like having so much money in my savings account – it creates an illusion of wealth.

It’s different from my investments, in that I find it burdensome to remove money from my brokerage account (and create a taxable event), whereas it’s easy to access my savings account. Knowing the money is just sitting there, and there are so many things I could buy, makes it hard not to spend it. I do my best to be frugal but I still struggle with buying things that I want but don’t necessarily need.

There’s no easier way to lose control of your expenses than thinking that you have more money than you actually do. After all, that money is earmarked. It just happens to be for many years in the future. I’ve gotten used to a much smaller balance in my savings account and it’s messing with my mind to have so much more now.

If interest rates go up, I’d consider a CD ladder. But they’re still low enough now to make me question if it’s worth the hassle.

Any suggestions on how to handle this? Is there a better place for me to store my early retirement cash reserve? I’d love to hear your thoughts and suggestions.

10 thoughts on “Overcoming The Illusion of Wealth

  1. Our savings account is linked to our checking account and credit cards. If yours is similar and there’s a physical branch you can go to, how about un-linking your accounts. Then go to the branch once a month and transfer what you need into checking. That would create a barrier to your savings account. Or, even better, why not put the cash earmarked for retirement into a money market account within your brokerage institute? Since you’re already fine with not touching your investments you can just park additional cash there.

    You realize that some people might think it unwise to save cash that’s not invested. I’m not one of them.
    Mrs. Groovy recently posted…That Time I Lied and Fake-Cried to Save My Family $1,000 in Airline FeesMy Profile

    1. All good suggestions! I’d like to have 2-3 years worth of expenses saved in cash by the time I (possibly) retire in 2026, so I wouldn’t have to withdraw from investments during a down market. Or at least withdraw less than no cash reserve.

      I agree it’s important to have cash as part of your portfolio. The predictably makes me feel more secure.

      Thanks for your help!

  2. Well first, congrats on the bonus! This is a great problem to have. 🙂 I’ve only gotten one bonus in the history of my entire career, so this is quite neat!

    If you truly have enough money in your savings account to cover 2-6 months of expenses and you could handle a catastrophe (car problems, medical issues), then investing is the way to go in lieu of savings. I’m still learning how to invest myself, so I don’t have much advice on what stocks to put the funds in, but I think giving them the chance to compound in an investment would be a good way to secure your FIRE.
    Mrs. Picky Pincher recently posted…What a Frugal Weekend! May 7My Profile

    1. Thanks! It’s always exciting when your employer wants to give you more money 🙂

      Investing would be my first thought but I’d like to start building up a reserve for retirement. I already invest most of my extra money each payday so my portfolio is very heavy in index funds.

      I don’t like the idea of making almost nothing on the cash so it’s hard to avoid the allure of the stock market!

  3. I still like the cd approach only because it gives you that psychological barrier from spending but is still liquid if you have something with an early withdrawal penalty.

    Beyond that I’d say it’s probably better to invest in the market/ real estate, or other avenue unless you foresee a more near term need. I wouldn’t hold more then 2-6 months unless retirement was this year. You can alway pop out dividends as you get closer or stop all investing in your last year to make cash,
    FullTimeFinance recently posted…Intrinsic Motivation, how to change yourself and othersMy Profile

    1. You make a great point – maybe I’m going about this wrong. I really like your idea of waiting until the last few years to build a large cash reserve. I was trying to tackle multiple goals at the same time but I might be better off using a more directed focus.

      I’m going to map that out to see how it looks. Thanks!

    1. Very true. A decision doesn’t need to be made today so it won’t hurt to take some time to think about it. Thanks!

  4. I get two annual bonuses per year, one in March and one in August. I know, I am lucky.

    Anyway, we just transfer the surplus into our taxable investment account. Do you have one of these? If we have upcoming expenses like property taxes, we will set aside just that amount in savings, but any leftovers go to taxable investments.

    Actually, this year I am retiring so I have to remember to set aside $5500 into my wife’s spousal IRA. I have too much income this year, and while not a bad thing, it’s absolutely terrible for my tax situation.

    1. I do have a taxable brokerage account and that’s where most of my money is going each payday. But I’d like to try to build up my cash reserve so that I have 2-3 years of expenses in cash by 2026 (my target ER date) so I’m trying to figure out the best way to do that. Maybe we’ll see interest rates go up so that CDs become attractive again?

      Agreed that more income is a pain in regards to taxes but it’s a great problem to have!

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