Financial Products Series: Cash
The financial products series, to briefly explain and evaluate a wide variety of financial products. This series should be useful to anyone who wants to gain a brief knowledge of different financial products.
This article is the third in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
Readers, what's your opinion on cash? What percentage of your portfolio should be held in cash?
Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.
This article is the third in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:
- Shares
- Structured Products
- Cash
- Current Accounts
- Savings Accounts
- Annuities
- Certificate of deposit
- Options
- Treasury Bills
- Bonds
- Tracker funds
- Credit
If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.
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| Picture from freedigitalphotos.net |
Cash
The word cash can refer to many things. In common usage it can refer to the notes and coins in your pocket. Cash can also refer to the more digital forms of money, such as the numbers on your bank statement telling you how much money you have available to spend, and thus available via debit card spending. Cash can also be held in multiple currencies at once.
The key to cash is that it is extremely liquid. This means that it is easily accessible to convert into spending power to buy different goods and services. It is the immediacy of ability to spend it that makes cash so desirable.
Why do we need cash?
One of the criticisms of cash is that there is very little, if any, return on cash. Furthermore, the spending power of cash is eroded over time by inflation. Some would argue that it is probably better to convert any spare cash into easily accessible investments. For example, you could move any spare cash into an everyday savings account (more on these sorts of accounts in upcoming posts).
However, the problem with not having cash is that you may need to go to the bank to take out a deposit, or else transfer funds online to a current account and then go to an ATM to take money out to be able to spend. Clearly, this is not ideal if you need cash suddenly.
Another reason that we need to hold some cash is because cash is generally less risky. Even with a run on the banks £80,000 (in the UK) of money held in assets such as cash are assured by the Financial Services Compensation Scheme. The rates on cash may not be as good but the risks are far lower.
Advantages
- Immediacy of access
- Use in emergencies e.g. if other assets fall in value or you lose your job and need to cover bills for a couple of months
- Can make transactions with it
- Least risky asset
- £80,000 covered by the Financial Services Compensation Scheme
Disadvantages
- Loss of value due to inflation
- Low rates of return
Overall conclusion
Score: 6
As an asset to make your millions it is one of the worst, but at least it won't lose you much money (apart from inflation).
Advice: I would hold an emergency fund in cash. This is something that you will need to gain access to in case you lose your job, or there is a sudden leak in the house, or general financial disaster which requires immediate financial attention. Traditionally people are advised to have about 3 months salary saved up in cash. I would actually argue that you should have only a months. In that time you can be cashing in investments or savings to support yourself if needs require (controversial I know! - let me know what you think of this).
Cash only requires ease of access. Therefore if you can find an immediate access cash ISA account to hold your emergency fund then this is ideal because you can potentially try to beat inflation as well as having an immediate access emergency fund.
As an asset to make your millions it is one of the worst, but at least it won't lose you much money (apart from inflation).
Advice: I would hold an emergency fund in cash. This is something that you will need to gain access to in case you lose your job, or there is a sudden leak in the house, or general financial disaster which requires immediate financial attention. Traditionally people are advised to have about 3 months salary saved up in cash. I would actually argue that you should have only a months. In that time you can be cashing in investments or savings to support yourself if needs require (controversial I know! - let me know what you think of this).
Cash only requires ease of access. Therefore if you can find an immediate access cash ISA account to hold your emergency fund then this is ideal because you can potentially try to beat inflation as well as having an immediate access emergency fund.
Readers, what's your opinion on cash? What percentage of your portfolio should be held in cash?
Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.
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