While the true origin of the phrase “Cash is King” is unclear, it’s been inspiring financial debate for decades.

During periods of short-term market volatility, nervous investors might be tempted to panic-sell to cash, while those inherently anxious about investing might favour the shoebox under the bed.

As with any financial choice, there are pros and cons to holding your wealth in cash. 

Here are just a few of them.

3 reasons why you might opt to hold some of your wealth in cash

1. Cash is easily accessible 

Whether you keep your cash with a high street bank, in an easy access Cash ISA or under your bed (we strongly advise against the latter), it is usually available very quickly when you need it. 

For this reason, it is usually advisable to use cash for your emergency fund. 

We would normally recommend that around six months of household expenditure be kept in an easy access account so you can use it to tide you over should the unexpected occur.

The money might cover bills following a sudden loss of income or pay unforeseen expenses that aren’t covered elsewhere (through specialist insurance, say).

2. Cash in a bank or an ISA receives regular interest

The money you hold in a bank, building society, or Cash ISA generally receives regular interest. This allows you to take advantage of compounding, effectively growth on growth.

You’ll need to be mindful of your interest rate compared to inflation rates and also shop around for the best deal.

Fixed-term Cash ISAs will often offer better rates than easy access accounts, but with the trade-off that your money is tied up for the term. Think about what you might need the money for and when, before committing to a fixed term.

3. You won’t lose cash if stock markets crash

For those savers favouring cash over investment, risk is likely to be the overriding factor.

Money held in cash with a high street bank or building society is protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 in most cases, and double this figure for joint accounts. 

It’s worth noting that the FSCS also protects money held in products like pensions and investments if, for example, a financial firm fails.

Your money is relatively safe then, and also won’t be subject to rises and falls in the stock market. As we have seen of late, markets fluctuate daily in line with many factors, including global political news.

3 reasons why you might consider a move away from cash, possibly to investment

1. Cash can lose spending power when inflation is high

When saving rates are low and inflation is high, your cash is effectively losing value in real terms, diminishing your spending power. 

If your emergency fund, say, is sufficient to cover the six months of household expenditure we’ve already mentioned, any excess might be better placed elsewhere.

2. Opportunity cost of missed investment returns

Holding money in cash rather than in investments means that you’re missing out on the potential for investment growth. This can significantly lower your potential returns over time. This is known as “opportunity cost”.

Investment carries risk, though, so you’ll need to be clear about some important factors like your: 

• End goal 
• Time frame
• Risk profile 

We can help here, so get in touch.

3. Investments often provide dividends, which can be reinvested for compound growth

Just as you receive interest on cash savings, you can receive dividends on your stock and shares investments.

These can provide a form of regular income, although there’s no guarantee of how much they’ll pay, or if they’ll pay at all. 

Rather than taking an income, you might opt to reinvest your dividends, which allows your invested fund to benefit from compound growth and could see your fund grow significantly over time.

It’s important to remember that past performance is no guarantee of future success. Your investment fund can rise as well as fall, and you could get out less than you put in.

Get in touch

Please contact us if you have any questions about investments versus cash holdings or any aspect of your long-term financial plans. De Mellow’s expert financial planners are on hand to help.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested. Investing does not provide the security of capital which is characteristic of a deposit account with a bank or building society. 

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.