With interest rates so low you may wonder why you should bother investing in cash. But there are many sensible reasons for investing in cash.
For a start we understand cash, we handle it every day, we know what it is worth and in general we are comfortable with it. There is a lot to be said for that comfort factor, whether the cash is a buffer for a rainy day or a fund that you draw on to supplement your income, it is good to know that the money won’t suffer the fluctuations in value like stocks and shares can.
Cash, as part of a balanced portfolio of investments, provides a stabilising effect. In general terms, the more cash you have the less risky the portfolio. Of course, less risk often means less reward.
If you are thinking of investing your pension fund, having a cash float is a good way of stabilising your income and protecting against the ups and downs of the stock market. Our article explains this strategy in detail.
If you have money already deposited then you should use the Rate Tracker service to track the interest rates you are getting and receive alerts when a better deal is available.
There is a balance to be struck between having emergency funds and paying out interest on expensive debt such as credit or store cards. Have a look at our area about managing debt to find out more.
Of course there are some dangers with cash. The bank or building society you deal with could fail and you would be left relying on the Financial Services Compensation Scheme (FSCS). This would limit the compensation to £75,000 per person, per bank or building society.
Cash also comes with the risk that if you hold on to it for too long it will buy less as inflation will erode its buying power.
Choosing where you invest carefully is important. Some cash funds offer good returns but do not always invest where you may think. Read fund factsheets and the fund objective will tell you where your money will be invested. If you don’t like, or don’t understand, where your money is invested you should seek advice. We have some information on cash and near cash funds in our library section.
Use cash sensibly to limit your risk and stabilise your short term position but investigate where you place your money, especially where overly generous returns are quoted.