Cash: An investment you probably wouldn’t make
The effect of inflation is a subject that is covered extensively and well understood by most. This, however, does not seem to perturb people from sitting on cash. A recent analysis by Hoxton Capital revealed that on average expat professionals over 40 were maintaining a cash float of £100,000. With inflationary pressure impacting almost all markets, cash savings are likely to be heavily impacted.
How much is too much cash to sit on?
The best way to answer this would be to establish how much cash is enough cash to hold and then assume anything over that is too much. A financial rule of thumb is that 3 to 6 months living expenses is a wise amount to keep in cash. An easy way to establish a length of time that you feel comfortable with, is to consider the longest period in your career that you have been out of work for. For most this will fall within the 3–6-month range, however as the last year has shown, there may be instances where this could be slightly longer.
So, if you spend £5,000 per month on bills and food and are comfortable that you are unlikely to find yourself out of work for more than 6 months, then £30,000 is a sufficient amount to keep in cash. If you find that you are out of work for longer, then 6 months is plenty of time to plan the liquidation of other assets.
What is the impact of holding too much cash?
Global inflation currently sits at 3.5% and inflation in the UK is 2.5%. Imagine you met with an adviser, broker or investment professional and they told you the following:
“I have a fantastic investment opportunity for you, its track record goes back hundreds of years! Since 1950 it has averaged a return of -5.14% a year and if you had invested £100,000 with me then, I’d be giving you back £2,758.74 today.”
Not a single person would take that offer when presented like that, but that offer is cash, and everyone is taking it. Even just going back to 2015 – £100,000 saved since then, now has a buying power equivalent to £87,072. You would need an extra £13,720 in order to purchase the same amount of stuff today, as your £100,000 would have bought you in 2015.
What can be done about this?
If you are not investing, you are going backwards. Your cash in the bank is invested by the bank and they are making money from it. It is not sitting there doing nothing for anyone, just nothing for you. It is understandable to want to have liquid funds that are not exposed to volatility, but not accepting any risk at all is a risk in itself. Using a low-cost platform and investing conservatively with the aim of simply matching inflation will not overexpose you and does not drastically reduce your liquidity. Selling out of a fund and withdrawing the capital may be a week long process rather than an instantaneous one, but the saving opportunity for most is worth the tradeoff.
Speak to one of our team to get set up with a cheap and easy to use investment platform and we can construct a low-risk portfolio to help you mitigate inflation.