How much cash should I hold or save?
HOW much of my savings should I have in cash? It’s a question we all ask ourselves when managing our finances.
It’s also a question that has crept up the agenda in many households due to the pandemic – both for positive reasons, because of the forced savings many of us have made by working from home and not going out, and for negative reasons, because many businesses are struggling and many employees have been put on furlough schemes or made redundant.
Our view is that your cash savings should always be tied to your personal financial circumstances (and to those of your partner and/or family). So, if you’ve been made redundant or are worried about your job prospects, for example, it’s all the more reason to consider putting extra cash aside.
Describing these things as a “rainy day” may be a classic British understatement, but they are the kinds of life events that a cash buffer is meant to help you with – to tide you over until you’re able to get back on your feet.
As a rule of thumb, three months of expenditure represents a reasonable cash target. It needs to be tailored to your circumstances and should take into account your regular outgoings, number of dependents, degree of leeway on any mortgage, the industry you work in, your partner’s situation, the transfer ability of your skill sets, savings you can make on more discretionary spending items, and so on.
In other words, the level of your cash savings should be personal to you and something you decide independently of any investments you make. We’d go so far as to say that you shouldn’t invest at all unless you have an adequate pot of cash savings to turn to for that proverbial rainy day.
But it can work both ways because if you do already have enough cash for emergencies, then you might want to think about investing the rest. After all, investing in a globally diversified portfolio of shares and bonds can help you earn a superior return in the long run while having too much cash in your portfolio can drag on your returns.
So, remember the order: cash savings for emergencies first, investments that seek a superior long-term return second.
You won’t get the kind of longterm returns with a rainy-day cash buffer that investing your money can potentially get you – least of all when interest rates are as super-low as they are currently – but at least you’ll have peace of mind knowing you have something quick to lean on through the bad times.
Remember, though, that the value of your investments can go down as well as up. Past performance is not a reliable indicator of future returns. Source: Vanguard UK 22nd July
Oliver Mellor Dip PFS, BA (Hons)
Information based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. Tax treatment is based on circumstances and may be subject to change in the future.
Although endeavours have been made to provide accurate and timely information, we cannot guarantee that such information is accurate as of the date it is received or that it will continue.