Are You Holding Too Much Cash?

Are you holding on to cash assets that are surplus to your requirements? What if that money were invested?

While it’s always nice to have cash in the bank, there is a balancing act to be struck between having enough of a buffer to deal with any emergencies that life might throw at you and having excess cash reserves which are not fulfilling their potential. How do you decide how much cash is enough and what should you do with the excess?

An emergency fund: how much is enough?

One of the basic tenets of a sound financial plan is an emergency fund. Any professional adviser will tell you this, although they might differ on exactly how much cash should be accessible to deal with emergencies.

The general consensus among Infinity advisers is that an emergency fund should be equal to six months’ worth of expenditure. This sum should be kept in the bank so that you can access it easily at any time.

The problem with keeping large cash reserves in the bank

Banks never offer the best rate of return and in recent years interest rates have been depressingly low from a saver’s perspective. Keeping excess cash assets is a lost opportunity. Your money could be working harder for you if it were invested, even in the most cautious of funds. And don’t forget that if the rate of interest isn’t keeping up with inflation, you will actually be losing money in real terms.

What difference will investing my cash reserves make?

It goes without saying that even a relatively low return on investment will be better than earning interest in the bank but you might be surprised at just how much difference it could make if you take your excess cash and invest it.

Maybe you will be able to retire years earlier, put down a deposit for your child to buy their first home, or fund a more luxurious retirement than you are expecting.

Here at Infinity we use sophisticated cashflow modelling software which enables you to clearly see how much difference investing your excess cash could make to your future.

The difference investing excess cash can make: a case study

Derek is 33 years old. He earns $4,000 per month.

With his Infinity financial adviser, Derek has set a retirement goal of $30,000 per annum and aims to retire at 60. He earns $48,000 per annum and it is assumed that this will rise with inflation of 2.5% per annum. After living expenses of $2,500 are taken care of, Derek has $1,500 leftover each month. He has invested just $20,000 which are earning a 4% return. He has also saved $100,000 of cash which is sitting in the bank, earning significantly less and barely keeping pace with inflation.

Our cashflow modelling software has flagged an issue with Derek’s retirement plan. Namely if he continues as he is, retires at 60, and spends his intended $30,000 per annum in retirement, he will run out of money after just 12 years, at the age of 72. Derek is Australian where the average life expectancy for males is 82 so he needs to take action to protect himself from a decade or more of potential financial woe.

The graph below shows Derek’s projected cashflow with his retirement shortfall clearly indicated in red.

Luckily, Derek’s Infinity adviser has a solution. They suggested that Derek invest half of the cash he has sitting in the bank i.e. $50,000 and the $1,500 leftover each month after he has covered his living expenses. This way, he maintains an emergency fund of $50,000 but the rest of his money will be working much harder for him.

This significantly changes his retirement situation, turning the red part of the graph blue. In this revised scenario, Derek will have enough money invested by the time he is 60 to meet his $30,000 per annum expenditure goal until he reaches the age of 90.

Now that’s what a financially secure retirement looks like!

If you’d like to get a clear picture of your financial situation and see exactly what difference investing your excess cash reserves could make to your future situation why not make an appointment to run through the figures with one of our consultants? They can produce similar graphs based on your personal information and show you exactly how additional savings could secure you a comfortable and worry-free retirement and even enable you to retire earlier.