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What can I do with my money? |
Cash Savings
What is a Cash Asset?
Cash savings are the simplest asset type to own. They are easy to understand and are typically the first places we all invest. Hand ups, how many of us put all our money in a savings account, leave it there and do nothing?
Why do we do this?
Cash savings are the simplest asset type to own. They are easy to understand and are typically the first places we all invest. Hand ups, how many of us put all our money in a savings account, leave it there and do nothing?
Why do we do this?
- It is very easy to understand, start and spend
- We probably heard parents, friends or others saying save save save
- It feels safe. No one can come and take it even if I am getting 0.25% return-aka mice food
- It will not suddenly go down in value
Cash does not grow fast enough to build real wealth
For most women, 71% of their assets are cash. The issue with this is, if you are focused on growing your money, cash has significant limits. You can say, "but my savings account gives me 3%! " . But in reality with inflation at 2%, you are only making a 1% return. Most savings accounts cannot grow fast enough to generate real wealth. If you want to build wealth, you need close to double digit interest rates. These rates can be achieved using other asset types so keep reading.
Instead, hold cash for a specific goal in mind
My view on cash is that we should hold it for a specific goal in mind. For instance, if you want to build your emergency fund, plan a holiday or buy a property.
Which savings account should I use?
In the UK, you can use an Individual Savings Account (also called an ISA) which are savings accounts that are are tax free. In each financial year, the government sets the maximum that you save tax free. For the 2018/2018 calendar year, the maximum allowance for your ISA is £20,000. If you go beyond this amount, you will pay tax. The ISA is a great tool to protect your asset.
In addition to ISA, don't just settle and use the savings account that your current bank provides. Shop around and find accounts with higher rates or additional incentives to help push your savings a little further. Feel free to move your money around when you find a better account. Keep an eye out on the terms as some providers might ask you to keep the money in for a long period in order to benefit. Others might ask you to put in a high lump sum.
Build an 8 months Emergency Account
This is a long term stable cash asset that should cover at least 8 months of your expenses at any given time (according to Suze Orman). Can you imagine how relaxed you'll be knowing that you have 8 months cushion when you are in a job that you don't like, it provides peace of mind and allows you to financially manage change.
Use a Cash ISA or Help to Buy ISA (H2B) to hold your emergency fund. A Help to Buy ISA typically has a relatively high interest but limits you to saving £200 per month. Currently, my ISA with Virgin Money provides an interest rate of 3% but this changes with central bank's rates. With a Cash ISA there are typically no limits to the minimum savings you can make. These interest rates are relatively lower when compared to a H2B ISA.
Save for a Property
If you are planning to purchase a home, you typically need a cash deposit. With this in mind, use a Lifetime ISA (LISA) or a Help to Buy ISA (H2B ISA) to build up your deposit over time.
For most women, 71% of their assets are cash. The issue with this is, if you are focused on growing your money, cash has significant limits. You can say, "but my savings account gives me 3%! " . But in reality with inflation at 2%, you are only making a 1% return. Most savings accounts cannot grow fast enough to generate real wealth. If you want to build wealth, you need close to double digit interest rates. These rates can be achieved using other asset types so keep reading.
Instead, hold cash for a specific goal in mind
My view on cash is that we should hold it for a specific goal in mind. For instance, if you want to build your emergency fund, plan a holiday or buy a property.
Which savings account should I use?
In the UK, you can use an Individual Savings Account (also called an ISA) which are savings accounts that are are tax free. In each financial year, the government sets the maximum that you save tax free. For the 2018/2018 calendar year, the maximum allowance for your ISA is £20,000. If you go beyond this amount, you will pay tax. The ISA is a great tool to protect your asset.
In addition to ISA, don't just settle and use the savings account that your current bank provides. Shop around and find accounts with higher rates or additional incentives to help push your savings a little further. Feel free to move your money around when you find a better account. Keep an eye out on the terms as some providers might ask you to keep the money in for a long period in order to benefit. Others might ask you to put in a high lump sum.
Build an 8 months Emergency Account
This is a long term stable cash asset that should cover at least 8 months of your expenses at any given time (according to Suze Orman). Can you imagine how relaxed you'll be knowing that you have 8 months cushion when you are in a job that you don't like, it provides peace of mind and allows you to financially manage change.
Use a Cash ISA or Help to Buy ISA (H2B) to hold your emergency fund. A Help to Buy ISA typically has a relatively high interest but limits you to saving £200 per month. Currently, my ISA with Virgin Money provides an interest rate of 3% but this changes with central bank's rates. With a Cash ISA there are typically no limits to the minimum savings you can make. These interest rates are relatively lower when compared to a H2B ISA.
Save for a Property
If you are planning to purchase a home, you typically need a cash deposit. With this in mind, use a Lifetime ISA (LISA) or a Help to Buy ISA (H2B ISA) to build up your deposit over time.
- The LISA can be held in cash ISA which is a saving account or as a Stock and Shares ISA where you invest in the stock market. Each month, the UK government provides an annual 25% bonus that is paid monthly on your cash savings or stocks & shares. You can use the LISA for only one of two things. Either you can use it to purchase a home valued up to £450,000 or you can use it as a substitute pension in which case you are not allowed to make any withdrawals until the age of 60. If you put in £4,000 a year, the government will give you £1,000 free and we like that.
- The H2B ISA can also be used to save up for a home. In that case, the government will give you £50 for every £200 you have in the account. Keep in mind that this is only valid for buying a house in the UK.
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Disclaimer
The content on WealthSquats are my own thoughts and is not financial advice. Consult certified financial experts to get information that is suitable to you.
The content on WealthSquats are my own thoughts and is not financial advice. Consult certified financial experts to get information that is suitable to you.
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