Is Cash always King?

is cash always king? By Kun

The simple answer here is no, but the reality and reasoning is much more nuanced than this. There is no denying that having cash readily available is a must have in life. In the event of an emergency, you will want to be able to access money fast.

With this is mind, it can be tempting to squirrel away as much cash as you can. But there really is such a thing as too much cash. And here’s why…. While there are rumours of change at the Old Lady where interest rates are concerned, the best instant cash rates are still currently less than 1%. (0.61% the last time I looked). Compare this to the current rising rate of inflation and you’ll quickly see why the purchasing power of your cash will be on the way down.

The three types of inflation have different rates, but all well exceed the 1% mark. The Retail Price Index, which includes mortgage payments and which is largely influenced by house prices and interest rates, stands at 3.9% - six times the best instant access interest rate we found. The Consumer Price Index takes no account of housing costs and just factors in all the other goods and services and stands at 2.5%.

Meanwhile, the Consumer Price Index does include housing costs, but uses an approach called “rental equivalence”, essentially calculating how much rent a tenant would pay for an equivalent property. This one is the lowest at 2.4%.

Whichever way you look at it, your cash will not hold its value in an instant access account, meaning that if you keep too much cash aside, you won’t just be losing out on investment opportunities, you will actually be losing serious money.

So how much cash should you hold? The amount of course depends on your own situation but as a rule of thumb, we recommend a minimum of six months total expenditure.

Beyond that, there are an unending number of things you can do with your money.

When we spoke to our colleagues, clients and industry peers, we found though that there were three main categories for how people spent their cash. Of course, people looked to invest it in alternative options to the low interest, instant access accounts or to pay off accumulated debt, a mortgage perhaps. Others, meanwhile, were more focused on doing the things that were important to them – putting it towards grandchildren’s education, donating it to charity or going on more family holidays to make lasting memories.

But there were also those who looked for a bit of both – an investment but in something that they were passionate about. Art lovers buying great art, wine buffs investing in fine wines and petrol heads splashing out on classic cars, all of which will bring joy and (hopefully!) a bit of money to boot.

“If you keep too much cash aside, you won’t just be losing out on investment opportunities, you will actually be losing serious money.”

The main message here then is, of course make sure you have enough cash to cover your expenses in an emergency, but for the cash over and above this, don’t let apathy be your decision maker. Take the time to be a bit more creative and find the right way for you to spend and invest it. It’ll be well worth the effort.

savers need to work harder to reach their goals Interest income no longer keeps pace with inflation