Investing your money involves some big decisions and your choices are seemingly unlimited. But often the simplest option is best. Cash is an ideal investment if you want to draw an income and preserve your capital, a valuable combination given the financial market volatility of recent times.
Cash and cash equivalents, such as savings accounts, term deposits and money market deposit accounts, are the safest investments when compared to shares, managed funds, bonds and property. By investing in cash, you can enjoy a guaranteed rate of return on your principal and by reinvesting the interest earned; you are able to grow your wealth.
The beauty of investing in cash has also been enhanced by recent tax changes. Half of the first $1000 of interest earned on cash deposits is now tax free, thanks to recent changes introduced on 1 July by the Federal Government, which also guarantees investments in certain cash deposits up to $1,000,000 per retail depositor.
Rising interest rates have fuelled a steady interest in cash, helping to deliver good returns to investors.
Cash suits many investors, whether you’re a retiree who can’t afford to risk your capital, or you’re risk averse. Even if you do have an appetite for risk and growth assets such as managed funds, shares and property, by investing some of your portfolio in cash it can serve as a safety net – no matter how bad financial markets perform, your cash investments are intact, still earning you interest.
Your time horizon may also draw you to cash. As at call cash deposits are the most liquid of investments, you can call on your money when you need it. With shares or property, on the other hand, it may take some time to sell your asset and, possibly at a loss, depending on the market.
But there is a catch with cash. The main risk with investing all your money in cash is inflation risk, that is, that inflation outpaces the returns on cash over time. This can erode the value of your principal. This risk can be mitigated by allocating some of your investment portfolio to growth assets such as shares or property, which typically grow at a faster pace than inflation over the longer term.
Deciding which mix of assets to hold in your portfolio is a very personal decision. The asset allocation that works best for you depends on your age, time horizon and your own risk tolerance.
At any rate, holding a mix of investments in your portfolio can help maintained your wealth over time. This practice of spreading investments among different asset classes, known as diversification, helps to reduce investment risk and smooth out the returns from your portfolio.
Once you work out how much cash you have to invest, deciding on which sort of cash investment you favour involves assessing your time frame and your own savings habits. Two accessible and effective ways to save are via high interest online savings accounts and term deposits.
Term deposits enable you to deposit funds for a set period or ‘term’, usually from one month up toseveral years, and receive a high rate of interest. In general, the longer the term, the higher the interest rate. Term deposits suit goal savers who are aiming to pay for a house deposit, holiday or school fees. They are also ideal for retirees or pre-retirees who are looking for security and guaranteed returns.
High interest online savings accounts, pay higher-than-average interest and often offer other features such as low or no fees. These are generally linked to another account you have that’s accessible by ATM or internet banking, so you can move funds back and forth as you need. Your funds are not locked away for a fixed term but are ‘at call’. These accounts suit people who may need their money at any moment, but who still want a good return.
The most important point is that you shouldn’t leave your savings in a low-interest transaction account, which may also attract fees. Returns on online savings accounts or term deposits are generally higher than transaction accounts, so they enable you to grow your wealth more quickly.
