The Importance of Cash

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The word ‘cash’ has a very different meaning now than it did a few decades ago but it is still a vital part of a financial plan. Cash provides liquidity; that is, money when you need it. Liquidity can take many different forms. It can be notes and coin, bank deposits, credit – such as revolving credit mortgage or a credit card – or a financial asset that can be quickly and easily sold, such as bonus bonds, corporate bonds, or shares. Ideally liquid assets should be available immediately if required, with no cost or risk of loss of value associated with access to the funds.

The various forms of liquidity have different advantages and disadvantages. The choice of how to access cash depends very much on personal circumstances and goals. The most liquid assets are notes and coin and bank call deposits. While they are easily accessible, there is potential physical loss with notes and coin as well as cost, which is the loss of potential interest or investment return on funds which are held in currency or call deposits. Shares offer good liquidity and the potential for investment return, but there is also the potential for investment loss should funds be required at a specific time which may coincide with a drop in the market. Using credit lines for cash is fast and easy but may come with a high interest cost.

The best approach is to have layers of liquidity. That is, have some funds in call accounts, some in short term deposits, a low cost line of credit (revolving mortgage) and other investments. The rule of thumb is to have easy access to three months of living expenses, but you may choose to have either less or more than this depending on your appetite for financial risk.

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