Financial Planning update: Why cash is not always king

Published: Wednesday 6 October 2021

The pandemic has caused financial hardship for many, with many industries still facing uncertainty. However, for those fortunate enough to stay in work, or be covered under the furlough scheme, there has been an opportunity to save and build up their cash reserves. This is due to limited spending opportunities on thing such as foreign holidays or meals out. With many working from home, the lack of a work commute has also allowed people to save on their travel expenses and have reduced monthly costs.  

For many, the last two years has provided a chance to take stock and start to plan for the future. For those who have accumulated cash over recent times there are a few factors to consider.

Why you should hold cash

Cash is easy to access and the value does not fluctuate, so for even the most adventurous investors it is a good idea to hold a cash reserve.

This should be split into the following three categories:

  • Everyday expenses – This is sometimes easier said than done, but it is common sense to have enough cash in your account to cover your monthly expenses. With some simple budgeting, taking into account your monthly income and expenditure, you should be able to work out your approximate monthly expenditure and what is left as surplus.
  • Emergency fund – As a rule of thumb you should ensure that you have at least 3-6months expenditure set aside to cover any emergencies such as an unexpected bill or a short period out of work.
  • Planned spending- It is important to budget and keep aside any cash planned for short term spending such as holidays or home improvements

Any good investment strategy should include a plan for cash.

When is cash not the best option?

If you have surplus cash that you are not going to need for at least five years, you might want to consider investing in alternative assets.

Your personal situation will determine how much of a cash reserve you need to set aside, but there are several reasons not to keep excessive amounts on deposit:

  • Interest rates are currently at an historic low point.
  • Cash reserves will be eroded by inflation. This means that as the cost of living rises every year, if your capital isn’t growing by the same amount, you are actually losing money in real terms.
  • The Financial Services Compensation Scheme protects Bank deposits up to a limit of £85,000 per person, per banking group. Therefore, if you hold more than £85,000, at the very least, you should consider spreading it across more than one bank.

Cash is not the ideal for large amounts of money that is likely to be held for the long term.

What to do with your surplus cash

If you do find yourself with surplus cash, there are matters worth considering that could improve your long term finances:

Repay debt

Higher-interest debt should be a high priority. If you have loans or credit cards, you will save significant amounts of interest by clearing the balance early.

If you are considering repaying your mortgage, weigh up the options carefully. Mortgages tend to have competitive interest rates, and they are secured against an asset that will hopefully grow in value. If you are prepared to take some risk, investing the money could improve your longer-term position. However, if you prefer to deal in certainties, reducing your mortgage could be a good use of your surplus cash.

Invest in property

Property is a popular investment, for many reasons. It has a tangible value, you are able to fund your purchase through borrowing, and most investors have dealt with property before.

Despite this there are a few factors that need to be considered prior to making an investment in property:

  • If you already own a residential property, a stamp duty surcharge will apply in most cases. This is 3% in England and Northern Ireland and 4% in Scotland and Wales, on top of the standard rates.
  • Property is illiquid and difficult to sell.
  • Historically, equities have outperformed property.
  • It is easier to reinvest your dividends to buy more shares. Using rental income to buy more property takes longer.
  • Managing a property incurs costs and administration.
  • While you can claim tax relief against mortgage interest, this is capped at the basic rate.

A sensible investment strategy

There is a huge range of investment options, regions, and sectors available to investors in today’s market. Choosing where to invest can be a daunting task and it can be tempting to follow the latest trends and invest in a hot stock or cryptocurrency. However, doing this is more closely related to gambling than financial planning and risks heavy losses.

Instead of following the latest trends and speculations a sensible and sustainable investment strategy has the following features:

  • It holds a wide range of assets. This allows you to benefit from market growth, while smoothing out the worst of the volatility.
  • It invests for the long term.
  • It avoids trying to time the market or achieve quick wins.
  • It keeps costs under control.
  • It takes an appropriate amount of risk for the goals and circumstances of the investor.

Please do not hesitate to contact a member of the team below to find out more about your investment options.

Key contacts

Kyle Nethercott
Kyle Nethercott
Partner
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Stephen Dick
Stephen Dick
Partner
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Gary Cook
Gary Cook
Partner
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Andy Hogarth
Andy Hogarth
Financial Planning Associate Director
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