Find out how having cash on hand, premium bonds, and money market funds in your portfolio can help you achieve your financial goals.
Is cash considered a type of asset?
Cash is an essential component in the construction of every investing plan. Cash is the only asset type that does not involve any form of capital risk; this means that if you keep your money in cash, there is no chance that you will suffer any kind of financial loss.
Physical currency, the balances of savings and current accounts, cash individual savings accounts, and NS&I Premium Bonds are all included in the asset class known as cash.
You can retain a large portion of your portfolio in cash and then diversify into other asset types that are riskier if you are not comfortable with the possibility of losing money. However, keep in mind the risk-reward trade-off: the more cash you have, the less likely it is that you will obtain a return on your investment.
You run the danger of seeing a decline in the purchasing power of your money if the rate of inflation is higher than the interest rate that you receive, which is a possibility if your money is held in cash rather than in an investment vehicle.
How can I make cash work for me?
The least dangerous option to earn returns is to keep funds in savings accounts and Isas; but, before you start investing, you should make sure that you have enough savings that are easily available to meet at least three months’ worth of expenses for living expenses.
You will be able to contribute up to £20,000 to a cash Isa during the 2021–22 tax year, and you will be able to add more funds to your Isa account on a yearly basis. You won’t have to pay taxes on any profits you make thanks to the interest you get paid.
But keep in mind that if you want to switch your Isa to a product that offers a greater interest rate, you should make an application to transfer it rather than withdrawing the money and reinvesting it on your own.
This is due to the fact that you will exhaust all or a portion of your tax-free allowance for the given financial year if you remove your money and then reinvest it within the same tax year. This is the case since withdrawing your money and then reinvesting it both count toward the same tax year.
Considering that investing is a strategy for the long term – at least five years – it makes sense to investigate fixed-rate Isas and savings, where interest rates are often higher than with other types of investments.
accounts for saving money
After you have invested the maximum amount allowed in your cash Isa, you have the option of moving any remaining funds to a taxable savings account. When selecting one, you need to pay close attention to the amenities it offers in addition to the interest rate it pays out.
Those who may need to withdraw money at a moment’s notice are good candidates for instant or easy-access accounts. These accounts can be used for emergency savings, but they don’t offer much increase (if any growth) over the rate of inflation.
When savers start a new account, they are frequently given the option of receiving interest at a higher rate. It is normal for these bonus rates to last for six to twelve months, after which they revert to a lower rate; therefore, it is important to make regular checks to confirm the rate that you will receive.
Watch out for cash when investing in stocks and shares. Isas
Cash can be held in stocks and shares Isas despite the name of the account.
This could seem like a good idea because the money will be immediately accessible whenever you are ready to make additional investments.
On the other hand, cash that is held in an investment savings account (Isa) for stocks and shares or a general investment account normally does not yield any income.
You would be better off putting money into an account that pays interest, ideally at a rate that is higher than the rate of inflation, such as a savings account or cash Isa.
Some online investment services now provide their customers with their very own cash savings choices.
What exactly constitutes the
NS&I is a savings and investments programme that is sponsored by the government and provides a variety of products that can assist you in saving money.
Because it is administered by the state, it ensures the safety of all of your savings, which is superior to the compensation of up to 85,000 pounds that is provided by the Financial Services Compensation Scheme in the United Kingdom in the event that a bank fails.
NS&I provides customers with a variety of products, including basic cash accounts and savings options for children. NS&I does not typically offer interest rates on its products that are competitive with those offered by other financial institutions; nonetheless, if you are interested in keeping your money completely secure, NS&I might be an excellent choice for you.
Its Premium Bonds are extremely sought after by investors.
These give you the opportunity to win between £25 and £1 million each month rather of paying interest, and while you can’t hold them in an ISA, any winnings you take home are completely tax-free.
Since the maximum amount you may invest in Premium Bonds is £50,000, they may not be as beneficial for individuals who already have substantial holdings.
What exactly are these “Money Market Funds”?
Money market funds are collective investment schemes that typically take the form of unit trusts and open-ended investment companies (Oeics), and they invest your money in cash or equivalents to cash, such as short-term loans to the government (also known as Treasury Bills), which pay a fixed rate of interest. Money market funds are also known as money market mutual funds (like a gilt).
Because the managers of these funds invest in a wide variety of cash and cash equivalent products, you can diversify your portfolio and avoid having all of your money confined to a single savings account or cash Isa by investing in these funds instead.
Investing in a “cash” fund can also make it easier for you to monitor the performance of your other fund investments while you are simultaneously constructing an investment portfolio. This is another advantage of making such an investment.
In contrast to a savings account or cash Isa, investing in money market funds exposes your wealth to the risk of experiencing a reduction in some or all of its value. You will also have to pay an annual management fee, which, in an environment with low interest rates, can have the effect of lowering any returns the fund generates.
Are you interested in greater returns?
This article is the second in a series of guides that cover several forms of assets, beginning with corporate bonds and moving on to gilts, equity funds, and share picking.
Simply click on the links to find out more information, and when you are ready to invest, look for an investment platform that meets your needs.