Proof your cash is going backwards (2024)

Cash is king, or so they say – but the reality is that you’ll never get rich saving money in a bank account.

Today you can get a return on cash savings of around 5 per cent, which seems high given we’ve just come out of years of ultra-low interest rates. But once you consider inflation is currently running at 6 per cent, it means your cash savings are actually going backwards.

A lot of people think that cash is a safe bet, but if you’re trying to build long term wealth, saving in cash actually comes with much more risk than you probably realise.

There’s a big difference between the long term return on cash and the return on other investments like shares. Consider this example.

The long term return on a savings account is 4.4 per cent vs shares at 9.8 per cent. If you’re earning the average income in Australia of $92,000, and saving at the average household savings rate of 4.5 per cent, it means you’re saving $80 per week.

Saving this amount of money each week in cash would grow to $52,138, $133,028 and $258,525 over 10, 20 or 30 years. If instead you were to invest this same amount of money into the sharemarket, your money would grow to $70,205, $256,521 and $750,979 over the same period.

The difference between the two is $492,454, meaning you’d be almost $500,000 better off by investing into shares rather than saving in cash.

Cash is important, because while we expect quality shares and other investments to increase fairly predictably over the long term, in the short term they can have wild ups and downs. Any time you invest, it’s critical you’re never forced to sell investments at a time when markets aren’t performing well.

How you make sure you’re never forced to sell is fairly simple – you need to have enough money to cover any spending you might want or need to do. Then you can invest with confidence knowing you won’t ever be forced to sell good investments at the wrong time. Further, you’ll have peace of mind that you can let your good investments do what good investments do over the long term – make you money.

So how much cash do you need?

Cover your planned spending

The first step in having enough (but not too much) cash is that you need enough to cover your planned spending. Simple enough, to be sure, but an important first base to cover.

Be clear on how much you need for your everyday spending, including both your regular and irregular expenses.

It’s common for your lesser expenses to be forgotten when you do a budget, but if this happens, you can be forced to dip into savings – so think ahead over the year about all the spending you want or need to do, and make sure you have it at hand when needed.

Plan for unexpected expenses

These are different to emergency expenses, and include random costs like replacing your phone or laptop, unexpected medical costs like a trip to the chiro after you push it a bit too hard at the gym, or needing to replace or repair something around the house.

We often don’t know what these things are ahead of time, but they will definitely come up over the course of a year. Having some money put aside for unexpected expenses will mean you’re not scrambling when they do arrive.

As a rough guide, include between $1000-$5000 per year for unexpected costs, depending on your income and lifestyle.

Your emergency fund

A solid emergency fund gives you some serious benefits. Having enough money in your emergency fund means that if something goes wrong, you’ll have the money there to cover it. Think serious medical issues, losing your job or deciding you need to quit, family medical or travel needs, or any other random things life may throw at you.

When you have money at the ready for whatever comes up, you’ll be able to rest easy with the peace of mind you’re good financially, no matter what.

Keep in mind that over time as your commitments grow, you’ll want to increase how much you have in your emergency fund. The right amount is driven by the actual risks for you and how you feel about those risks, but clearly someone who is 21 and lives at home will need less in an emergency fund than someone who is 40 with two kids and three investment properties.

Invest the rest

Once you have your day-to-day spending covered, money put aside for the unexpected and a security blanket for emergencies covered, you know with total confidence that any surplus savings you have can be invested for the long term.

This is where you’ll actually make money.

The wrap

Cash is important, but if you want to build wealth and really fulfil your financial potential, you should aim to minimise how much cash you hold at any time.

This will mean you invest more, and in turn that you’ll get ahead faster.

That being said, cash delivers some important benefits, including making your spending stress-free, knowing you’ve got money for unexpected expenses and emergencies when they come up, and most of all, that you’ll never be forced to sell investments at the wrong time.

Disclaimer: The information contained in this article is general in nature and does

not take into account your personal objectives, financial situation or needs.

Therefore, you should consider whether the information is appropriate to your

circ*mstances before acting on it, and where appropriate, seek professional advice

from a finance professional.

Ben Nash is a finance expert commentator, financial adviser and founder of Pivot Wealth, the creator of the Smart Money Accelerator, author of Replace Your Salary by Investing and host of the Mo Money podcast. He runs regular free online money education event which you can book here.