Regardless of whether you’re just starting out in your career or you’re on the fast track to an early retirement, effective cash management needs to be an essential part of your financial plan.
Particularly in Asia, where saving is such an ingrained part of its culture, many people have too much cash in their overall personal portfolios. That’s right: Just as there’s such a thing as not having enough cash, there’s definitely such a thing as having too much cash.
Here, we’ll unpack the latter: How much is “too much” cash? And why is “too much cash” a bad thing?
The purchasing power of cash decreases with inflation, so you’re actually losing money if you leave excess cash in your current account.
Even if you consider yourself risk-averse, there are low-risk, medium-to-long-term investment options that can earn a return on your cash.
Even if the markets are down, don’t sell off your long-term investments unnecessarily: this means that your money suddenly goes from a long-term growth strategy to most definitely not earning anything.
Cash may appear to be liquid and safe, but the reality is that if you have too much of it and the cash you do have isn’t in the right places, your cash isn’t safe.
That’s right — cash, when improperly managed, isn’t safe.
What we mean by that is that you’re actually losing money when excess cash isn’t in the right vehicles, because the purchasing power of cash inevitably decreases with inflation. While this effect may not have been so obvious over the past few years of low inflation, we’re now seeing global inflation reach their highest levels in decades. And at an annual inflation rate of 5%, your cash loses half its purchasing power in just about 14 years.
Nominal returns (before deducting for inflation): Savings account: 1%, StashAway Simple™: 2.9%, and Invested: 6%. And Malaysia's average inflation rate: 2.1%. These return figures are for illustrative purposes and may not reflect actual returns.
Because cash loses its value over time, it’s important to understand exactly how much cash you should have and where you should keep it.
You should only have 1 to 2 months of cash in your current account to cover your immediate expenses.
You should have 6 months worth of expenses in an emergency fund. Keep these funds in a low-risk, liquid, interest-earning account.
StashAway Simple™ is our ultra-low risk cash management portfolio that lets you earn competitive returns on your cash. It has a projected 2.9% p.a. return on any amount (seriously, any balance has that projected return), with none of the hassle of investment requirements, credit cards, tiered earning structures, and whatever else the banks have come up with to make it painful to manage your cash. You can withdraw any amount of your funds at any time without penalties.
If you’re risk averse, you’re probably afraid of losing money. And, as we know, if you have too much cash, the value of your money is most definitely declining. Sure, your cash doesn’t have a huge downside, and this inherently makes it low-risk, but having too much cash does mean you’d be unnecessarily writing a death sentence for a portion of your cash.
It can be deceiving to think that you aren't losing money, because unlike investment accounts that show your positive or negative returns, current accounts don’t show that the cash's purchasing power is actually declining. In fact, it’s like being in an investment that has an invisible ever-worsening negative return. Though cash itself isn’t an investment, it’s still an asset that you must manage intelligently as part of your financial plan.
If you consider yourself risk-averse, there are low-risk, medium-to-long-term investment options that can earn you more than you more than what cash management solutions might.
In fact, our lowest-risk investment portfolio has earned an annualised return of 2.3% and cumulative return of 11.2% in USD terms since its inception in 2017¹. How? “Low risk” means that you’re not exposing yourself to a large downside — it doesn’t mean you’re not able to earn returns. Our investment framework, ERAA®, strategically and uniquely maximises returns within a given risk constraint. Your money should be accessible and low-risk, and that’s why we don’t have any lock-up periods.
Dividends that don’t get reinvested can cause cash allocations in portfolios to compound. At StashAway, we reinvest your dividends to make sure we’re making the most of your investments.
We also use fractional shares down to 0.0001 of a share to maximise the power of your cash. To be as efficient as possible with your investments, we target a 1% cash allocation for your portfolios.
Your cash management strategy is absolutely part of your long-term financial plan. A successful long-term financial plan requires discipline not to overspend on your monthly budget and not to tap into your emergency fund for non-emergencies (no matter how badly you think you need that vacation, we promise you it's not an emergency). Likewise, it also requires discipline not to liquidate your long-term investments unnecessarily.
Irrationally, people often “get in and out of the markets” when they feel uneasy about the markets or economy, or if they’re trying to capture earnings when they think the markets are high. We already know that the likelihood of you re-entering at the ideal time is slim to none, usually ultimately resulting in lower potential returns.
But, there’s another problem with taking your money out of medium-to-long-term investments: It increases your cash allocation for an indefinite amount of time. That means that your money suddenly goes from a long-term growth strategy to most definitely not earning anything. Plus, when are you going to go back in? Right away? In a year from now? Who knows! You could be waiting months, missing out on the markets’ opportunities, and losing to inflation.
¹ Returns of our General Investing portfolio with an SRI of 6.5%, as of March 2022.