Why You Should Hold Cash

10/12/2015

With interest rates at record lows for such a long time many savers have felt forced to become investors just to retain the real value of their money. This week I look at three reasons why you should have some cash available at all times.

The first reason is to provide for your day to day expenses. It seems obvious but if there is not enough money in the bank you will incur borrowing fees and may suffer the embarrassment of returned cheques or refused card payments at the check-out in your local supermarket.

The second reason to have cash available is to meet unexpected costs. There is always some expense or other that needs to be paid. By having cash in the bank you do not have to borrow money (which is expensive) or cash in investments (which are supposed to be long term).

The final reason is to provide you with the opportunity to time when you buy things. This may be during the sales in your favourite shop or investments after a market correction. Having cash enables you to save money by buying things when the time is right. This may not be the same as the time you actually need the item.

So, whilst holding cash does not provide you with a great return at present. It does provide you with a number of advantages that no other asset can. For this reason, most financial planners recommend you hold between 3 and 6 months’ expenses in a bank account which is available at relatively short notice but there are powerful reasons, like those above, to consider holding more.

Looking at this list, the items also make a strong argument for not spending all of your income every month as failure to save anything on a monthly basis leads to a very unstable financial position with plans being easily blown off course.

I hope the above is useful. Please let me know if you have any questions or comments.