Should I use the cash I have to actively invest for the future? This is not an uncommon question we are asked this type of thing on a regular basis.
Our first thought is always to think of the alternative to investing. For example is there any debt that might be paid off first?
We quite frequently find clients who have credit and store card debt where the rate of interest they are paying is a multiple of the rate of interest they are receiving on their cash savings.
That makes little financial planning sense because debt is truly a drag it gets in the way of people achieving the things that they want in life. And yet we perfectly understand the emotional attachment to hard earned cash savings and understand why some people are reluctant to use it to pay off debt.
Should the money be invested though? How long is the proverbial piece of string?
Cash (despite the banking problems of the last few years) is capitally safe whereas “investments” conjures up a whole basket of degrees of risk because of course it depends where the cash is invested.
I spoke with a young lady on the phone yesterday and she was looking for “capital growth”. She had accumulated cash and already owned an unencumbered property and no other debt.
What might we be recommending for her?
Well the answer is at the present time nothing at all. We simply don’t know enough about her, her goals and objectives and most importantly her appetite and tolerance for risk reward and volatility to provide any kind of meaningful advice. After we have met with her and asked a whole load of questions we may be better placed to help her.
She also has retirement planning needs and we can address these by considering the advantages and disadvantages of conventional pension arrangements and other forms of investment.
Don’t think retirement planning automatically means putting money into a pension plan. For a basic rate taxpayer there are other alternatives to consider.
So the hierarchy of cash use in our view should be, emergency fund, pay off debt, consider the degree of investment risk for longer term and then retirement planning.
