Cash, and it’s place in your overall wealth creation strategy…
It’s probably the most basic form of investment to understand. Those of us in Australia grew up with a dollarmite account, where we put $1 or $2 or 50 cents a week into the account and watched it grow so that we could learn about saving and about earning interest.
It’s that simple, you put a dollar in the bank and that dollar doesn’t grow, but it does earn interest, which if you leave in the bank and add more dollars will keep earning more interest therefor your savings balance grows.
Grow your dollar
The important thing to take from this though, is that a dollar is always a dollar. The actual capital value of cash doesn’t grow. It stays the same. Unlike property and shares where you earn income but you also have the possibility of capital growth, cash stays the same.
This is a really important concept to grasp because if you invested all of your wealth always in cash and never invested in any shares or property or anything else, you’d likely go broke in a very slow and safe fashion.
Why do I say this? Isn’t cash safe and secure? It sure is, but the problem is inflation. By the time you take into consideration the effects of inflation to offset the interest you’ve earnt on your cash, and then subtract any income tax you’ll need to pay, you’ll be struggling to break even.
We refer to this as ‘Don’t go broke safely’.
It may feel good and safe and secure to have all your money in cash, but diversification is the key. You definitely, 100%, without a doubt need cash to form part of your wealth, the benefit of being able to take out as much or as little as you need instantly and the stability are very important.
But don’t stop there, once you have a decent cash position, it’s time to start building wealth through shares or managed funds, and ultimately property.
Don’t put all your eggs in one basket counts for cash too. Even though it feels safe, there is always that long-term inflation risk if you don’t have other assets.