Cash is king – basic rules regarding excess cash

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Nicholas Riemer | Head | Investment Education | FNB Wealth and Investments Solutions | mail me


The common expression ‘cash is king’ holds true in today’s uncertain and volatile market; with many investors and consumers turning to cash as their financial buffer option. 

Deploying your excess cash responsibly

Those fortunate enough to have some excess cash on hand are in a unique position within the global context as workers across the world continue to grapple with the economic fallout of COVID-19.

While there may be the temptation to utilise excess cash flow on shorter-term expenses, recent events have emphasised the importance of positioning your finances for an uncertain future.

Paying down debt

With the reduction in interest rates, this may be a good time to restructure some your debt. Excess cash can be utilised to eliminate more expensive shorter-term debt.



Store and credit card debt is regarded as expensive debt and eliminating amounts owed through these facilities will ensure that less of your money is going towards paying interest.

Taking on debt

The reduction in rates has also meant that consumers can now afford more debt-funded assets. However, one must always keep in mind that increasing debt levels increases risk, regardless of the cost of debt.

Investing

The March 2020 pullback in asset prices has meant that some of your long-term investment goals may have been interrupted.

However, it has also presented investors with the opportunity to acquire assets at discounted prices. A major concern for most investors is current market volatility and the market moving against them. However, short-term volatility is not indicative of a long-term trend.

Investments held long term can withstand more volatility than investments held over a shorter time frame. Historically, staying invested in the market for the long term has resulted in success.

Savings and building up emergency cash reserves

The importance of having extra funds easily accessible was made clear during the recent lockdown shock.

Even if you were not personally affected, at some point in your life you will very likely require some extra cash for an unplanned expense, halt in the economy, or a job change.



Having three months of expenses saved in an accessible vehicle means not having to divest from longer-term investment vehicles, which will further enhance your ability to stay the course.

Excess funds present an ideal opportunity to reduce debt, put goals back on track and provide that safety net in emergency savings. Your hard work has resulted in some extra cash, now make that money work for you.


 



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