By Maria Smit*
A question I get asked a lot lately by clients holding backing from investing at the moment is: ‘Where should I keep my cash?’ This is a very good question, and one you should be thinking about not only to try beat inflation, but also for the security of your money.
Cash sitting in a general purpose bank account is incredibly tempting. Not only to you, but also to criminals who are always looking for easy prey. As much as we’d all like to believe we won’t be caught out in a phishing attack or scam, this is happening multiple times a day across the country.
So, why take the risk, is what I always ask.
Here’s why keeping large sums of cash in a current account is a bad idea, and ways that you can lower your risk.
Why some investors are holding cash
The past year has not been kind to investors, leaving many wondering what 2023 will bring. The year started off on a bad note as inflation started rising, especially after the Russian invasion of Ukraine.
Since then, markets across the globe have been in a tough bear market that relies heavily on the inflation picture improving. Which fortunately, it seems to be.
The depressed market has led some clients to sit on the sidelines rather than invest while the market is still in a downward phase. There’s certainly nothing wrong with avoiding the possibility of short-term losses, as long as you have a firm intention of getting into the market at a strategically-timed point.
As we’ve seen time and again, it’s impossible to predict the bottom of the market. And while ‘buying the dip’ is a great strategy, how do we ever truly know we’ve hit rock bottom? We can’t.
So, trying to time the market is never really a good strategy. But holding back capital to deploy at strategic points is.
Where shouldn’t you hold your cash?
If you decide to adopt this strategy, one of the most important questions is: where do I store my cash? If you’re likely to jump onto an opportunity, you might want to keep it in a current account so that it’s always liquid.
This is not a good idea. Firstly, current accounts usually don’t pay interest, so the value of your cash is declining all the time. And, secondly, unsecured cash in your account is a temptation – both to you and to criminals.
Don’t fall into the trap of believing that it’s never happened before so won’t happen in the future. And if that happens, the risk of loss is much smaller if you have less cash available for the taking.
So, I usually advise clients to avoid holding excessive amounts in their current accounts. Which then begs the question: where should you hold your cash reserves? That all depends on your time horizon.
Short-term saving options
A simple savings account is the first option to consider. If you feel the need, you can use an instant access account – like a Call Account – to take advantage of opportunities without any delays.
A simple way to avoid temptation, or the chances of fraud, is to open a joint account on which your spouse or partner must approve transactions.
The obvious appeal of savings accounts is that the interest helps to offset the effects of inflation. So, the better the rate you better you’re able to protect your buying power.
Depending on how disciplined you are, you might want to choose a 30-day notice or fixed-term account if you feel you need some separation between your impulses and your savings
Long-term saving options
If you’re looking at longer-term options – I’d say at least seven years and longer – then you need to sit down and do some proper planning. A simple, or even term, savings account is not the right solution.
I always advise that if you’re looking to the long term then you need to get serious and speak to a financial advisor who can help you find the best solution. With such a long time-horizon it’s usually advisable to have some exposure to the market, even though the market is precisely what you’re looking to stay out of.
You will only find the right answer by sitting down to decide on your priorities and to consider your options. And because there are so many options to consider, sometimes it’s not about finding the ‘best’ option, but the ‘right’ one.
And you have the added peace of mind that your savings won’t be exposed to the greedy fingers of criminal syndicates looking for accounts stuffed with excess cash.
- Maria Smit CFP® professional is an advisor at Brenthurst Pretoria [email protected]
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