With interest rates now higher than they have been in several years, cash has suddenly returned as a more attractive asset class with higher income and low risk.
Many often forget that since the Global Financial Crisis, a Government Guarantee has existed providing protection to depositors of up to $250,000 per account-holder per authorised deposit-taking institution (ADI) (bank, building society or credit union) if that ADI fails.
Other than security and peace of mind, why is it a good idea to hold a cash reserve?
Many income protection insurance policies have a waiting period before monthly benefits commence after a claim is accepted. A cash reserve helps you ‘self-insure’ for this gap and better manages the risk of a sudden loss of income.
Saving for a short-term goal
If you are saving for a planned expense within the next two to three years, it may be prudent to do this in cash. All other asset classes expose your savings to the risk of suffering from a capital loss in the short-term.
Liquidity for unplanned or ‘lumpy’ expenses
Your cash reserve acts as a cushion to absorb the impact of a large outflow or unbudgeted cost. This helps remove the fear of ‘running out of money’.
Know the risks
No capital growth is possible and holding cash instead of other assets exposes you to interest rate risk and a loss of purchasing power from inflation.
The amount you should hold in a cash reserve varies individually from person to person depending on your circumstances. If you are self-employed or in a partnership, your cash reserves will likely need to be higher to adequately provision for your income tax obligations.
Our Wealth Management team can assist you calculate your liquidity targets.
Brendan Bate (ASIC No. 1272327) and HLB Wealth Pty Ltd (ASIC No. 428645) are Authorised Representatives of Paragem Pty Ltd, ABN 16 108 571 875, AFSL 297276.
Disclaimer: The information contained in this article has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. Before you make any decision regarding any information, strategies or products mentioned in this article, you should consult your financial adviser to consider whether that is appropriate having regard to your personal objectives, financial situation and needs.