Why Cash Isn’t Always King: Building Wealth for the Long Term

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There is a risk to your capital and you may not get back the full amount invested. The value of investments, as well as the income from them, can fall as well as rise.

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When it comes to managing money, many people instinctively believe that holding cash is the safest and smartest option. After all, cash feels secure. It’s tangible, accessible, and doesn’t fluctuate in value like investments do. But while cash plays an important role in financial planning, it’s not always the best choice for creating long-term wealth.

Let’s explore why cash isn’t always king, the importance of an emergency fund, and why investing could be the key to achieving your future goals.

The Role of Cash: Emergency Funds First

Before we talk about investing, it’s essential to acknowledge that cash does have a critical role in your financial plan. Every household should maintain an emergency fund, typically three to six months’ worth of essential expenses, held in an easy-access savings account. This fund acts as a safety net for unexpected events such as job loss, medical emergencies, or urgent home repairs.

The reason for keeping this money in cash is simple: liquidity and certainty. You need to know that the money is available immediately without worrying about market fluctuations or penalties for withdrawal.

Beyond the Emergency Fund: Why Cash Falls Short

Once your emergency fund is in place, holding large sums of cash for long-term goals such as retirement, children’s education, or buying a second property can actually work against you. The main culprit? Inflation.

Inflation is the gradual increase in prices over time, which erodes the purchasing power of money. While your £50,000 might look the same in your bank account after 10 or 20 years, what it can buy will be significantly less.

The Impact of Inflation: A Real-Life Example

Let’s assume an average inflation rate of 3% per year. Here’s what happens to £50,000 over time:

• After 10 years:
  The real value of £50,000 falls to approximately £37,000 in today’s terms. That’s a loss of £13,000 in purchasing power.

• After 20 years:
  The real value drops further to around £27,500. You’ve effectively lost almost half of your money’s value without spending a penny.

This silent erosion is why relying solely on cash for long-term objectives can be detrimental. While your money feels safe, it’s actually shrinking in real terms.

Why Investments Make Sense for Long-Term Goals

Of course, investing comes with risks. Markets fluctuate, and there’s no guarantee of returns in the short term. Investments can go down as well as up, and you may not get back the original amount invested.  However, with a well-structured plan, diversification, and a long-term horizon, investments can significantly improve your chances of meeting your financial goals. You will only lose on an investment if you cash it in at the wrong time, so taking care on when to withdraw funds can be vital.  Your professional adviser will always help you make the right decisions, at the right time.

Striking the Right Balance

The key is balance. Keep enough cash for emergencies and short-term needs, but don’t let fear of risk prevent you from investing for the future. A financial adviser can help you determine the right mix based on your goals, time frame, and risk tolerance.

Final Thoughts

Cash is essential for security, but it’s not a wealth-building tool. Inflation quietly erodes its value, making it unsuitable for long-term objectives. By combining a solid emergency fund with a thoughtful investment strategy, you can protect your financial future and give your money the opportunity to grow.

If you’re unsure where to start, speak to a qualified financial adviser who can help you create a plan tailored to your needs.