Why Cash is Not Necessarily King

It’s always a good idea to hold some cash. It’s easy to access, and the value doesn’t fluctuate. Even speculative investors should keep some cash aside, split into the following main categories:

Everyday Expenses

It’s common sense that you should have enough money in the bank to cover your expenses until the next payday. But this is sometimes easier said than done.

To budget effectively, you will need to have an idea of your income and expenses every month. Only then can you work out your surplus, which you can use for other purposes.

It can be useful to hold at least three separate accounts, for example, bills, shopping, and fun money. This way, you have a limited amount to spend on discretionary items, and your essentials will be covered.

Emergency Fund

You should also make sure you have at least 3-6 months of expenditure set aside for emergencies.

This means that if you have an unexpected bill or a short period out of work, you can cover your costs without going into debt, or dipping into investments intended for other purposes.

Planned Spending

It’s important to set aside cash for short-term expenses, such as holidays, home improvements, or gifts.

If you rely on pension or investment withdrawals to cover your expenditure, you should also aim to keep a cash buffer within your investment allocation. This means your investments have more time to grow whilst having a cash buffer to cover any withdrawals. This way you can encash when you are ready, rather than being forced to sell during a downturn.

Any sensible investment strategy should include a cash plan.

When is Cash Not the Best Option?

Once your cash reserves are fully funded, how much cash do you really need to keep?

The answer will depend on your situation, but there are several reasons not to keep excessive amounts on deposit:

• Interest rates are starting to fall as inflation comes back down.
• 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.
• Bank deposits are protected by the Financial Services Compensation Scheme, up to a limit of £85,000 per person, per banking group. So, 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 asset class for large amounts of money that are likely to be held for the long term.

If you have surplus cash that you don’t need for at least five years, you might want to consider other options.

What to Do with Your Surplus Cash

Spending it would be the obvious answer, but there are few things you can do that would actually improve your financial situation in the longer term.

Repaying Debt

If you have expensive consumer debt, such as loans or credit cards, you will save significant amounts of interest by clearing the balance early. Once your cash reserves are fully topped up, repaying higher-interest debt should be a high priority.

If you are considering repaying your mortgage, weigh up the options carefully. Mortgage interest rates may be lower than the potential returns from investing, so the latter option may be more financially worthwhile if you are looking to grow your net worth.

If you are prepared to take some risk, investing the money could improve your longer-term position. However, there are no guarantees, and if you prefer to deal in certainties, reducing your mortgage could be a good use of your surplus cash.

Investing in Property

Property is a popular investment for many reasons. Most investors have dealt with property at some point and may find it easier to understand than the stock market.

It has a tangible value, and few other investments allow you to fund your purchase through borrowing.

But before you use your hard-earned savings to put down a deposit on a buy-to-let, bear in mind the following:

• If you own a second residential property, a stamp duty surcharge usually applies. After the 2024 Autumn Statement, this surcharge is now 5%.
• Property is illiquid and difficult to sell.
• Historically, equities have outperformed property.
• It is also easier to reinvest dividends to buy more shares, while using rental income to buy more property takes much longer.
• Managing a property incurs costs and administration.
• While you can claim tax relief against mortgage interest, this is capped at the basic rate.

The Benefits of a Diversified Portfolio

Alternatively, you may prefer to invest the money in your ISA, pension, or other investment vehicle.

You should only consider this if you are prepared to leave the money invested for a minimum of five years, ideally longer. In the case of a pension, you won’t be able to access the money until at least age 55. – age 57 for April 2028 unless the plan has protected pension age

The investment options in today’s market are virtually endless. It can be tempting to follow trends and put all your money in hot stocks and cryptocurrency. However, doing this risks heavy losses and is more closely related to gambling than financial planning.

A sensible investment strategy has the following features:

• It holds a wide range of assets. This allows you to benefit from market growth whilst 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 don’t hesitate to contact a member of the team to find out more about your investment options.

The value of investments can fall as well as rise and is not guaranteed. 

Your buy to let property may be repossessed if you do not keep up repayments on your mortgage.

Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate estate planning and some types of buy to let