Thursday, 29 January 2015

Cash is King?


I am often asked by clients: How much cash should I hold and what should I do with it? This is the first step in having a successful financial plan as cash is required for everyday use and emergencies; however, holding too much cash can have a negative impact on your wealth, especially in times of low interest rates as we have at the current time. Cash is also required at times when you are saving for something in particular such as a new car or a deposit for a house. It offers a safe option with good security for your money as long as you don’t hold more than the amount covered by the local protection scheme, for example; the Cyprus Deposit Protection Scheme (currently €100,000 per depositor per institution).

How much cash should I have? This varies due to personal circumstances but broad guidelines depend on your stage of life. If you are single with no dependents then three to six months of income is sufficient cash to hold. If you are married or have a family then you should aim to hold between six to twelve months of income as cash and if you are now retired a good guide is between one to two years of income as cash in the bank (or under the mattress as you prefer!). If you are saving for something specific you may need to hold more cash. If you look at your entire assets in total (property, cars, stocks, shares, bonds, artwork, etc.) then you should try to have less than 20% of your entire asset value in cash.

When you do invest in cash you give up other opportunities to invest and generate potentially higher returns. If we look at the returns here at the moment you are probably getting around 0.5-1% per annum credit interest (if you are lucky!). With long term average inflation rates of 2.4% in Cyprus (3.1% worldwide) any cash holdings are actually losing value and purchasing power year by year. By doing some research, taking good advice or being a little more adventurous you can quite easily find secure, liquid investments such as high quality government / corporate bonds yielding 3-5%+ per year. By investing excess cash into mutual funds / exchange traded funds you should see average returns over the longer term of 6-8% plus. As an example over the last 10 years a cash portfolio would have brought average annual returns of 2.9%, a balanced bond portfolio 6.9% and a balanced equity/share portfolio 8.1% per year.

What should I do with my cash? The first thing is to make sure you are not holding too much cash and then make sure you are not holding more than the amount covered by the deposit protection scheme. After that you should try to find the best possible interest rates available to you. You may find that by taking advantage of term deposits (where you agree not to withdraw the cash for 1 month to 5 years) you can get some much better rates on your cash. Shop around and look for the best deals. It’s also worth considering a mix of currencies for larger cash holdings. £’s and $’s can be useful to hold as protection against currency fluctuations especially where you may be spending money or have assets in other countries outside the EEA.


In summary, firstly make sure you have sufficient cash reserves for you situation, secondly for any excess cash that you have, look for better investment returns and finally try to get the best interest rates for the cash you do hold.

Have a great day! Andrew Lumley-Holmes

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