Having too much cash might seem impossible – but people actually find themselves with too much cash more frequently than they might think.
The sale of a home or investment property, an inheritance, a redundancy payoff – they can all mean becoming suddenly cash rich. Of course, there are worse things in life – but having wealth in cash has become expensive.
Inflation whittles away the value of cash disturbingly quickly. The latest reports from the treasury suggest that inflation may finally be falling from its devastating 3% high of recent months, but it still cuts the spending power of cash faster than most savings accounts can build it.
So what can you do if you have too much cash?
How much is too much?
Having 3 months of household income is often recommended as a financial safety net. Anything more than that might be unnecessary.
Cash does not mean actual cash, stuffed into a mattress. An instant access account will let you have your cash as you need it and still give you some returns. The comparison sites can help show where the most rewarding account might be at any particular time, but beware. Some of the best are introductory and vanish after a few months. Keep an eye on the best offers and be prepared to move funds as soon as you find a better rate.
Investing vs saving
The best way to deal with surplus cash may be to invest it.
It’s important to understand the difference. With savings, your money is kept as cash, and it is lent out by the bank or building society to individuals and businesses, who pay substantial interest. The organisation passes on a proportion of the interest back to you.
Savings are safe. Returns are guaranteed, and the Financial Services Compensation Scheme will protect the first £85,000 you hold with any one bank or building society if it goes bust.
With investments there are no such guarantees. You cash is used to buy something – perhaps shares on the stock market, or government or company bonds, and the value of your investments can go down as well as up. But here is a big advantage. If you pick the right investments, your cash can work much harder for you.
Getting started in investing
Investing means risk but it is where you’ll get the most growth. To avoid short terms ups and downs in the market affecting your wealth its best to take a medium term view, with about five years being the usual basis.
It can all seem bewildering at first, but you don’t need to cherry pick individual shares yourself. The choice of shares can be outsourced to a fund manager, or a tracker fund that just follows a stock market index. Investing though a fund gives you an investment diversified across a range of companies, spreading your risk. If one performs badly, others may excel, smoothing out overall returns.
There are many funds available. Finding those that invest in a sector of your choice, and with a level of risk (or potential for growth) that you feel comfortable with may need some professional help.
At Continuum, we can advise not just on the right fund, but on the tax and other arrangements you need to make your investments work their hardest for you.
The value of investments can fall as well as rise and you may get back less than you invested.