For many people, cash is a “security blanket”, making them feel warm, cosy and safe, but that security comes at a price. Cash under the mattress or even in most current accounts will slowly be losing value as inflation erodes its actual buying power.
Various economists or other interested bystanders have suggested other measures of value like Mars bars, Big Macs, lipsticks or men’s underwear, all of them showing that over time the value of cash declines and its buying power decreases. Using the Mars bar as a measure, back in 1971 a Mars bar was 2p, these days it will be 51p. Between 1974 and 2014, 40 years, the cost of a Mars bar rose 1,317%!
People are no longer as afraid of inflation as perhaps they should be. The Bank of England’s long term target is 2%, which they are currently undershooting, but even this modest figure would suggest that the value of your cash would halve every 35 years. If inflation was 8%, your cash would halve in value in less than 10 years. In 1974, the inflation rate was 25%, which would reduce the value of your money to half in less than 4 years.
Conversely, having no cash at all can also be a disaster; when bills need paying or you want a pint of milk from the corner shop, illiquid investments are no use whatsoever. You will be contemplating a forced sale, most likely at a loss, just to make ends meet.
This is where moderation in all things becomes important; holding too much cash will ruin your investment returns, while too much committed to investments will make paying for day to day living more complex and expensive than necessary.
Structured financial planning seeks to find an optimum position; hold enough cash for about a year’s expenses; hold enough liquid investments for a rainy day and invest the remainder of your investable assets into a diversified investment portfolio. As an investment target, can I suggest “more than inflation, without taking unnecessary risks”?
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The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.