Yes, you can have too much cash

Is it possible to hold too much cash?

If that sounds crazy, like a trick question, that’s because it is. And, therefore, the answer is the opposite of what you would believe it to be.

Yes, it is possible to hold too much cash.

Sure, we all love the folding stuff. The more you have of it, the more comfortable you feel. There’s nothing like checking a bank account balance and being surprised that there’s more in there there you were expecting.

But from an investment perspective, too-much cash is a bit like the Zika Virus. Unlikely to kill you, but certainly not likely to do you much good either.

Returns on cash are currently painful. The real returns – after tax and inflation – are hovering around 0-1 per cent. A term deposit for Joe Average of 2.9 per cent becomes 1.9 per cent after income tax (of 34.5 per cent), which is only marginally ahead of inflation, sitting at 1 per cent.

Mortgages with offset/redraw accounts are a considerably better. If your home loan rate is 4.5 per cent, then you are earning, tax-free, 4.5 per cent (or 3.5 per cent, after taking away inflation of 1 per cent). Not great, but nearly four times the 0.9 per cent return from a term deposit.

When the Reserve Bank cut official interest rates to 1.5 per cent, we didn’t even get time to pop some champagne before the major banks announced they wouldn’t be passing it all on.

Banks passed on about half of the 0.25 percentage point rate cut. The rest was being “saved” for savers, to offer them higher interest rates on their deposits.

Returns from cash are in the toilet. This is unlikely to change anytime soon. If you’re holding cash at the moment, what should you do?

The answer isn’t simple. And will actually be different for everyone.

It depends on many factors, including what you will eventually need the cash for, when you’ll need it and how much risk you’re prepared to take to get a better return.

Moving your money to anywhere other than cash – that is, to fixed interest, property or shares – is to take on a bigger risk with your money.

Let’s look at the decisions in life stages.

The young and debt-free

If you’re saving to buy a house … when? If less than two years, stick with online high-interest savings accounts. The returns are poor, but you can’t risk losing those savings. Continue to save as hard as you can.

If home-buying aspirations are further away than two years, you could consider allocating some of your savings to shares or property trusts. The longer the time period, the more you could funnel into higher-risk assets.

Mortgages and midgets

If you’ve got a mortgage, then you certainly want to have some savings sitting in your offset or redraw account.

But at some point, you have enough cash to last 40 days and nights of rainy days. Start to invest in assets outside of your home. At some point, shares and property for medium to long-term investments have to be enticing.

Debt-free older savers

Accept that cash returns will be poor for many years. Should some of your savings be directed to something other than term deposits?

Yes. But working out what portion is a conversation to have with an understanding financial adviser. If you’ve been getting depressed about how little income you’re receiving, then look for help now.

Self-managed super funds and retirees

This is who I’m hearing the most concerns from. They got burnt during the GFC, have been sitting on loads of cash ever since, and can’t invest because they’ve found themselves paralysed when it comes to re-investing.

Bonds/fixed interest – this is the asset classes you need to study up on, or help with from an adviser. Fixed interest is the “Afghanistan” (or Mark Waugh, or Forgotten War) of investing. But it’s an asset class that will deliver better diversification of your defensive asset allocation and generally with a better income stream.

Bummed out interest rates are great news for those with mortgages – but for the fact that they point to uncertain economic times ahead.

But for those who rely on the interest being earned … it’s time to stop complaining and look further afield. There are options out there. Find them, or hire someone to help you.

Bruce Brammall is the author of Mortgages Made Easy and managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au.