Holding some cash or near cash investments are necessary for being able to meet day to day costs/emergencies whilst being poised for an opportunity.
The issue arises where we have most our assets sitting in cash over time, which is a common mistake.
Below are a few reasons why this is possibly the worst thing you can do –
1. Loss of purchasing power through inflation
Inflation results in the loss of purchasing power (i.e. what we can buy for every £/ $ of disposable income) of your cash.
This is due to the increase in prices of goods and services without a corresponding increase in the value of our cash.
It, therefore, pays to invest your cash in an environment that generates some returns to at least cancel the effects of inflation.
2. Loss of time and the benefit of compounding
You have heard the phrase “time is money” many times, although nothing quite demonstrates the impact of the loss of time and related benefits as compounding interest does.
Compounding interest (or dividends etc.) plays a huge role in your future wealth creation.
Put simply, it is your initial investment (principal) creating money (e.g. a dividend), and the bigger pot (principal+dividend) now creating more and more money for you year after year after year.
By holding cash over time, you are missing out on a massive potential for your wealth creation.
Here is an illustration:
let's assume you had £10,000 in savings in a bank account earning nothing, and every month you saved £250.
Let's assume you are 30 years old and we want to see how your money will change over the next 25 years assuming you maintained your savings rate above.
Now let's compare what your pot will look like in 25 years under two scenarios-
- You held the above savings in cash and earned little or nothing for it for 25 years (Blue line below)
- You invested your cash and earned a return of 7% per annum compounding over 25 years (Green line below)
As you can see, the lifetime value of your pot is transformed dramatically through the power of compounding (£250k pot achieved via compounding vs £85k without).
Achieving this requires patience and having a long-term view, whilst ensuring your money is invested in the right environment.
Scenario analysis:
Below is a scenario analysis that shows you how your money grows over time, for various percentages of compounding growth.
Here you see that even at a 2% growth rate over 25 years, your money still grows to a respectable £113,348 vs £85,000 with no compounded growth.
Furthermore, the earlier you start investing, the bigger the impact of Compounding as the curve above gets steeper (i.e. your money is working harder for you over time).
Therefore, for those that have a family, investing for your children is critically important as you have the benefit of investing from birth and could have a sizeable nest egg by the time they turn 18.
3. Lack of investing skill and learning over time
As you will know, the more you work any muscle, the stronger and more defined it becomes as time passes.
Investing is a process and requires the time commitment and willingness to learn. You will inevitably get better at it provided you decide to get involved and invest your cash.
Check out 85 Ways To Make Extra Money for more investing ideas.
4. Weak attitude to risk
I have learned a lot by asking simple questions about assets and companies I want to invest in and most importantly putting my money where my mouth is by taking the plunge.
Sometimes it has worked against me, but most of the time has worked in my favor; and with dollar cost averaging, it's ok to make mistakes as you are investing smaller amounts over time.
Investing your cash over time improves your attitude to risk because you get involved in doing the work and collating the information before investing your hard-earned cash.
Doing this will improve your attitude to risk over time and your confidence about what to invest in and when.
Do you have cash sitting idle? What are some of your reasons for not investing it?
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.
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