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Everyone should hold a reasonable amount of cash on deposit for emergencies and short-term expenditure requirements, both personally and in your business. However holding too much at present really can make you poorer. Here is why....
At present, the average rate of interest* you may expect to receive on your cash can be as low as 0.3% per annum. This obviously isn’t great but at least you are not losing money, right? Wrong.
There is the small matter inflation to consider and the current CPI (Consumer Price Index) is running at 4% per annum (as at April 2011). This means, on average, our cash is decreasing in value by 3.7% each year. Therefore the real rate of interest is actually -3.7% each year.
So for those people with reasonably significant cash holdings, you may want to think about alternatives to cash. Here are some options to think about.
Anything that is not cash will almost certainly carry an element of investment risk where values can fluctuate. However Absolute Return Funds are often targeted at minimising volatility and generating returns to simply beat the returns available from cash. The sector average return for Absolute Return funds over the last 2 years is 14.7% (IMA sector average as at April 2011), which is a siginificantly higher return than what cash deposits have generated and also exceeds the rate of inflation.
You can get a better rate of interest in some accounts by locking your money away for a certain period of time. At present (April 2011), 5 year fixed rates of over 4.5% per annum are not uncommon and this would ensure that at least for the foreseeable future your money would be getting a better return than the rate of inflation. You should be aware that access can be a problem so only tie-up money that is not needed in the short term.
As well as looking at the overall rate of return, it is really important to ensure that your investments are held in the most tax-efficient way. If you are a 40% tax payer and you are receiving 1% per annum in interest, the actual net return after tax is only 0.6% per annum and therefore you are losing 3.4% per annum based on current (April 2011) CPI inflation rates.
By using some or all of the following tax privileged investments you could start to increase the real returns your investments generate:
Those people who enjoy the most success with their investments make sure they are structured in the most tax-efficient way as they know that a lot of the return they generate can be wiped out by taxes if they are not careful.
We constantly look for the most tax-efficient and suitable investment options for our clients to ensure that they stay ahead of the game.
If you would like to have a chat about the current rate of return you are getting on your personal investments or even cash held within your business, please send an e-mail to email@example.com and one of our financial planners will be in touch with you.
* IMA Money Market Sector Average Return as at April 2011 over a 12 month period was 0.3% per annum
Please be aware....
When investing, the value of your investment and the income from it can fall as well as rise and is not guaranteed - you may not get back the full amount invested. The past is not necessarily a guide to future performance and any tax rules may change in the future. You probably knew this stuff anyway, but just in case....