It’s important to work towards have plenty of pennies saved. Doing so will give you options and give even your most ambitious dreams a chance to develop. Even if you haven’t been reading Magical Penny from the start, you know this!
But it can be hard in two ways:
- It can be hard working out how to live on less than your income and putting money away consistently in a savings account. Budgets and goals can help immensely but eventually you simply have to learn how to do it like second nature.
- Once you have built up your savings a bit, it can be hard making sure you don’t spend them again! Even when you feel first-hand how empowering it is to have pennies saved for emergencies and opportunities, you may come close to justifying spending all your savings away. I have!
However, like anything that you do deliberately over time, you’ll get better at it. Better at putting money away; better at staying focused; better at achieving savings goals. You may not think it but you could soon start developing a new problem: Having too much cash!
Cash is King?
As your pennies grow slowly over time you may find yourself, in a surprisingly short period of time, with several thousands sitting in a savings account –preferably an ISA if you’re in the UK. After working so hard to save and keeping those savings untouched it’s only natural to want to see a return on your money. But even if you’re monitoring the interest rates and making ISA transfers every so often, the interest rate on your savings account ultimately is not that important, because cash is cash : a safe, liquid (immediately accessable) low return investment. That’s why you should be saving cash: for your short and medium term needs!
A Good Problem to Have?
When you’re first begin growing your pennies, building up cash reserves is the best thing you can do. But if you want to grow your pennies long term, cash will not grow in value: even with interest your hard-earned money will largely lose value to inflation: Having too much cash may seem like a good problem to have but it’s really not.
It Can Happen to Anyone!
Many people may find themselves with this problem if they religiously take advantage of the cash ISA limits each year. It might seem like a good idea at first but if you’re not making a return on your money and you’re not spending it either, then huge potential growth is missed. Current ISA rules recognise that cash is not the best vehicle for long-term saving: You can only save half the total yearly allowance in cash: the rest must be in other assets like stocks and shares. You can also easily transfer any cash in an ISA to stocks and shares (although not back to cash again).
Is Cash Over-Loved?
I was prompted to write about the tyranny of cash after reading the findings of the recent study by Clydesdale and Yorkshire Banks 75% of respondents were in favour of a change to the ISA rules to allow savers to invest up to the full ISA allowance in cash alone. If this happened it would allow savers in the UK to save over £10,000 in cash every year instead of the current allowance of £5100 tax free cash saving.
Read the full article here.
Whilst raising tax-free saving limits would be great in itself I think the findings of the study demonstrate that many people are intimidated by other asset classes like stocks and shares – ignorant of the huge potential of other asset classes to grow in value while cash reserves stagnate with every passing day. Cash still has its place: it’s great for its flexibility but leaving it in its current form, rather than investing it in other asset classes can be the difference, over 40 years, between having a few thousand pounds and having millions.
We’re Only Just Beginning!
If you’re reading this and you’re in your 20s and 30s it’s unlikely you have the problem of too much cash at this point in your lives. Keep at it. So whilst it is possible to have too much cash when saving long-term, it doesn’t hurt to save as much as you can first before putting it to work!
And Magical Penny is here to show you how to do exactly that: now that we’ve been through the basics we’ll begin moving towards the subject of investing and the opportunities available in the stock market –allowing you to put your pennies to work.
As the survey showed, for many, stocks and shares are intimidating but hopefully in the coming weeks you’ll begin to understand that rather than representing too much risk, asset classes other than cash offer a huge opportunity to grow your pennies over the long-term.
I’m pleased to have you along for the ride. 🙂