The experts at Goodbody discuss how much cash to keep on reserve and how to get the rest of it working for you …
Got some excess cash? Great, the drinks are on you! We’re joking of course (wink!). However, extra money in a time of high inflation is both a blessing and a curse. While it’s essential to have money in the bank for ongoing spending and emergencies, cash that is only sitting in your account is quickly losing value. Below, we discuss how much cash to keep on reserve and how to get the rest of it working for you.
Excess cash in your account is only losing value
The exact amount of money you need in the bank depends on your financial situation and preferences. Standard advice is to hold six months’ worth of expenses, which should cover any unforeseen circumstances. A sale at your favourite shop might be seen as an “unforeseen circumstance” but remember this is your emergency savings pot, not your designer brands pot! After the pandemic, many people have more cash in their accounts than they currently need for security purposes. It’s human nature to hold on to this money but Irish retail bank deposit rates are still low, so it is worth exploring what options may be available to you to get a positive return. Investing your money fights inflation and avoids the erosion of your purchasing power – and we don’t just mean your shopping budget, we mean your overall wealth.
Keep the following considerations in mind:
1. Carefully consider what your current and future cash requirements may be – look at your current household bills and any future maintenance costs you might have.
2. For cash that may be required due to unforeseen circumstances, make sure that your liquidity needs are matched to your investment. Don’t put money assigned to your short-term goals into something, for example say a ten-year bond, that you can’t take it out of easily.
3. If you identify cash that is truly excess, think about what you want to use it for and discuss with your financial adviser a suitable investment plan to make the most of its future value.
What to do with extra money
Let’s say you have excess cash and need the amount to stay liquid with a low level of risk, what are the options available to you? The following are just some examples of strategies available but always seek advice to understand what might be best for your specific circumstances.
Government Bonds
High grade short duration government bonds are always a good option. Gross yields of nearly 3% are currently available on AAA-rated short-dated (less than one-year) euro government bonds. Term bank deposits are also an option but harder to retrieve your cash from in a hurry.
Income Portfolio
For investors with a larger amount of excess cash and willing to accept a little more risk on capital value, another option is positive-yielding, high grade, short-maturity fixed income portfolios. These portfolios can be constructed using core government bonds, high quality corporate securities or a blend of both. This low-risk conservative blend can generate a gross yield up to 4%.
Blended Investment Portfolios
The longer you spend invested in the market, the higher the potential rewards. A blended investment portfolio of equities and bonds is the higher-risk alternative for excess cash. Remember that equities (stocks) alone are higher risk, with exposure to market vulnerability, a company’s loss/profit margin and many unforeseen events (Covid-19, anyone?). However, based on the historical data available to us, a well-balanced investment portfolio has a high probability of keeping its value and adding significant growth over a period of more than five years.
Take control of your excess cash
The most important thing is not to let excess cash sit stagnant in your account. As inflation climbs, your wealth is rapidly losing value. Talk to a financial advisor and consider your financial big picture. Look at how much money you need, and the risks you are (unwillingly) exposing yourself to. Taking small steps to diversify your wealth will avoid capital erosion, grow your money, and preserve your purchasing power – very important for those upcoming sales!