Our sister company Robson Laidler Accountants and Tax Advisers have scheduled a Webinar Wednesday 9 September on “Cashflow Management”. This event is for business owners and you can contact firstname.lastname@example.org if you would like to attend.
But what about our own, personal cash reserves?
Whilst the last 6 months have not exactly been fun, it has caused many to reflect on their financial situation. As planners, we think that’s a good thing. Sadly, many people have struggled throughout this period because their sources of income have been affected – the furlough scheme has been great but not everyone has been eligible.
One thing that hasn’t changed is the basic cost of living and it has exposed the fact that many people have little or no cash savings to fall back on in an emergency. On the other hand, you might have heard those whose jobs have been unaffected say that they are sitting on lots of cash because they’ve not been able to spend it! Who says life is fair?!
So, what is the “right” amount of cash?
- Too little? We would say less than 6 month’s basic bills is probably a bit light and it would be a good goal to get to this level at least. Not always possible we know but if an unplanned emergency arises i.e. the car engine goes, the roof leaks, a global pandemic occurs…it’s helpful to have a bit in reserve.
- Too much? When all your liquid assets are in cash. Bank deposit rates have been extremely depressed for around 12 years now and don’t appear to be zooming up any time soon. If you had £100,000 in cash in 2008 it would be worth around £68,000 in real terms today – this is based on the Retail Price Index each year since then. That’s 32%. Even if the bank had given you 1% per annum you’d still be down about 20%.
- Just right? We think that, if humanly possible, it’s sensible to have at least enough cash for 6 month’s basic expenditure. In addition to this, retain any big short term spends that you know you will have to make (bullet car repayment/wedding/house deposit) in cash. If, after this, there is anything left, we’d recommend investing it at a risk level thst is right for you. If you’d invested £100,000 in a globally diverse moderate risk portfolio (60% equities and 40% fixed interest funds) over that same period you would have generated a return of around 205% (Based on MSCI World Indice 60% and Bloomberg Barclays Global Aggregate Corporate Bond Indice 40%) over the same period, and that’s after a global pandemic.
We speak to new clients who are retaining most, if not all, of their liquid assets in cash bank accounts. They are frustrated that their cash is “going backwards” in real terms but have had poor experiences of investing in the past (endowment policies, high charges, adviser charges not disclosed, highly targeted salesmen) so understandably find it difficult to trust that the markets will work for them. We think they can.
Please note – past performance is not a guarantee of future performance and investments can go down in value as well as up.