Cash Is King? Here Are 3 Ways to Make Your Cash Work For You
Cash provides a tangible way for people to think about money. Even in this day and age where Singapore is moving towards a cashless society, the safety of cash is undeniable.
A survey by Global Investment Manager, Blackrock, found that Singaporean investors are overweight in cash - with most Singaporean investors holding almost half their assets in cash (47%), as compared to their China and Hong Kong investors who hold 37% and 33% in cash respectively.
That being said, does it really make sense to hold on to cash? Before we explore this concept, we must first understand the reasons for holding cash and the pros and cons of doing so.
Why we hold on to Cash
There are 4 main reasons people hold their money in cash:
1) Transaction purposes - the ability to use money in daily transactions or short term goals such as holidays or gifts, regardless of whether it is physical cash or for cashless payments.
2) As an emergency fund - saving for a rainy day. Perhaps one of the most important reasons for holding cash is to have liquidity. Having your money locked up in investments like stocks makes it difficult for you to withdraw it in an emergency situation. You may even suffer losses if you are forced to sell your investments at the wrong time.
3) Unaware of alternatives for growing money - most of us have probably developed the habit of saving money in a deposit account under the influence of our parents. We could have become so comfortable with this habit that we have neglected the need to look around for other ways to grow our money.
4) Building a war chest
Astute investors would probably agree that having cash is handy when the right investment opportunity strikes. After all, the market doesn’t wait so if you don’t have the cash on hand, you might miss out on a timely opportunity.
Disadvantages of holding cash
Looking at the 4 reasons above, it does look like there is a need to hold some cash as part of our overall assets. A key benefit is the liquidity cash provides. As the most widely accepted form of payment, you know that you will have little problem using cash to pay for whatever purchase you are making.
On the other hand, a major disadvantage of having too much of our financial assets in cash is that its monetary value diminishes over time due to inflation. As Blackrock rightly pointed out, "There is a significant gap between current holdings and financial goals, which makes it even more challenging for Singaporeans to generate their target annual investment returns of 8.4 per cent."
While inflation figures might be low on a year-on-year basis, the cumulative effect in the long-term means saving your money in the bank account is eating away at your purchasing power due to the low interest rates. Let us use a simple example here to illustrate the concept:
- You deposit S$1 into a savings account today.
- A cup of coffee cost S$1 today.
- Average inflation is 2% - To take inflation rate of 2% into consideration, $1 would need to become $1.02 (1*1.02) in the next year to have the same value.
- Average deposit interest rate is 0.5% per year.
|Year||Price of Coffee ($)||Money in your savings account ($)|
Numbers are for illustrative purposes only. The illustrated amounts under Prices of coffee are rounded to the nearest 2 decimal places. The illustrated amounts for Money in your savings account are rounded to the nearest 3 decimal places.
Comparing the effects of inflation and the interest you earn from a savings account, you can see that starting from year 1, you will not be able to afford that same cup of coffee with the $1 you’ve saved in the bank.
While this amount may look small, imagine the cost of inflation applied to your food spending for a year or large ticket items like a huge medical bill. In fact, medical inflation in Singapore is at a steep 15% in 2015. Take for instance, a 4-day hospitalisation at SGH for a viral illness like dengue will incur an average bill size of $1,384 in ward class B2. Within a decade, this bill will multiply by 4 times to about $5,600.
What you can do to make your cash work hard for you
The key to preserving the value of your money is to seek out alternative savings or investment options that can help you manage the cost of inflation. Some of these options include:
Bonds - Bonds can be an attractive investment for those who want a steady source of income without incurring too much risk. Unlike stocks, bond holders face a relatively lower risk of default. In recent years, Singapore has launched the Singapore Savings Bonds(SSB), which is a good alternative to holding your money in cash. The SSB pays out a slightly higher interest rate than the deposit rates for a normal savings account. You can also redeem the bonds anytime. However, any redemption before the maturity date will mean that you may receive a return that is less than the projected rate.
Insurance Savings Plan - Insurers in Singapore are responding to Singaporeans’ demand for savings alternatives by coming up with innovative savings plans that provide protection as they save.
Savings plans such as Gro Sure Saver allows you to enjoy guaranteed yearly cash benefits from the end of the 2nd policy year onwards (if all necessary terms and conditions are fulfilled). With a wide choice of premium terms of 15 to 25 years available, you will be able to choose a premium term that you’re comfortable with. Most importantly, it also provides coverage for death, terminal illness, and total and permanent disability (TPD before the anniversary immediately after the insured reaches the age of 70) as you save.
The yearly cash payouts mitigate the need for liquidity for those who want to have some cash on hand. At the same time, there is also an option that allows those who do not need cash urgently to accumulate these cash payouts to earn interest.
Investment with protection - In order to beat inflation and make your money work harder for you, it is advisable to keep a part of your portfolio in investments that can help you grow your wealth.
Investment-linked policies (ILP) such as VivaLink allows you to invest while staying protected. VivaLink gives you access to an extensive range of funds managed by experienced fund managers. Staying invested for the long term provides you with the potential to gain higher returns. The flexibility to make unlimited fund switches at no cost and top-ups or withdrawals as often as you wish (subject to terms and conditions), also means you save costs when you re-balance your portfolio as a result of changing market conditions.
Most importantly, VivaLink also provides protection against unforeseeable events such as death and total and permanent disability (TPD before age 70). Its unique No-Lapse Guarantee benefit allows the insured to remain protected regardless of cash value in the first 10 policy years.
Having reviewed the various aspects of cash, we can see that cash can be king, depending on how you use it. There are benefits to maintaining an adequate cash reserve to handle emergencies, but use it unwisely and its true utility diminishes. Remember to consider the savings alternatives highlighted in this article and take action to safeguard your wealth today!
This article is meant purely for informational purposes and should not be relied upon as financial advice. The precise terms, conditions and exclusions of any Income products mentioned are specified in their respective policy contracts. For customised advice to suit your specific needs, consult an Income insurance advisor.
This advertisement has not been reviewed by the Monetary Authority of Singapore.