A man checks an empty wallet. When younger, focus more on building assets, even if cash flow is not as high. PHOTO/MICHAEL KAKUMIRIZI
Have you ever wondered what works better when deciding whether to hold your money in liquid cash or invest it in assets?
Prosper Magazine conducted a mini-survey to understand what motivates people to choose one form over the other. The results reveal key factors influencing financial decisions, including security, growth potential, accessibility, and economic conditions.
A significant number of people, the majority of whom were over 35 years of age, told this magazine that beyond covering daily expenses, cash is a poor way to store wealth.
Left idle, its value erodes due to inflation, and in basic savings or checking accounts, it earns minimal interest at best.
In contrast, some youthful respondents expressed a preference for holding onto cash, believing it provides a greater sense of security and control.
Many cited trust issues with assets, often shaped by past experiences from parents, as a key reason for keeping their money in physical form rather than in financial institutions or even at home.
As the saying goes, one size does not fit all. Our survey found that three out of five Gen Z respondents emphasised that, even if the amount is small, having physical cash gives them a sense of control and security, alleviating fears of financial vulnerability.
This demonstrates that despite the risks associated with carrying cash, this preference remains strong among certain individuals.
Many individuals over 35 years of age have observed that substantial wealth is often built by holding appreciating assets such as company shares or other valuable investments rather than by converting them quickly into cash.
They point out that liquidating these assets too rapidly can erode their intrinsic power. For founders, this is particularly significant, as their ownership not only represents a financial stake but also confers voting rights and influence over company decisions, a key source of both pride and authority.
Consequently, if liquid cash is needed, it is wise to sell shares gradually to preserve that influence.
Joseph Areu, an independent financial advisor, draws a compelling comparison between liquid cash and fixed assets by using real estate as an example. He explains that owning and renting out an apartment not only generates a steady stream of rental income but also benefits from the property’s appreciation over time.
This dual advantage contributes to increasing overall wealth, thereby highlighting the potential long-term benefits of holding fixed assets instead of merely keeping cash.
For 10 to 20 years, an investment might grow dramatically, potentially multiplying its original value by four or five. Conversely, if the primary goal is to secure steady income throughout that time, opting for a long-term bond can offer regular earnings, effectively serving as a reliable fixed asset.
Objective-oriented
According to Mr Areu, the most critical factor in deciding where to hold your money is your financial objective.
If your priority is maintaining liquidity for short-term needs, cash or near-cash instruments offer the accessibility and security required. On the other hand, if your goal is long-term growth, it is wise to allocate assets into investments designed to appreciate over time; thereby, optimising returns in line with your future aspirations.
When an investment is intended to be held for more than five years, according to Mr Areu, it is best categorised as a long-term asset. This classification reflects the investment's role in achieving substantial growth over an extended period, allowing for the benefits of compounding returns and potential capital appreciation.
Long-term investments, such as stocks, bonds, or real estate, are generally less sensitive to short-term market fluctuations and are structured to yield higher returns over time.
In contrast, short-term assets like cash or near-cash instruments such as money market funds or certificates of deposit are prized for their liquidity.
They provide quick access to funds for immediate needs or unforeseen expenses. However, the trade-off for this ready accessibility is that short-term assets typically offer lower returns, including lower interest rates, since they prioritise safety and ease of conversion over high growth potential.
Thus, the decision to classify an investment as long-term is based on both the investment horizon and the investor's objectives. For those not requiring immediate liquidity and seeking to benefit from higher returns over time, long-term assets are generally the more suitable choice.
While short-term investments typically offer modest growth, long-term assets such as real estate can yield substantially higher returns. For instance, holding a property for five to 10 years before selling may result in a return that is triple your initial investment.
However, Mr Areu also cautions that real estate, particularly land, suffers from poor liquidity. Selling it can take a considerable amount of time, sometimes as long as a year, which could be problematic if you need immediate access to your funds.
What percentage of your cash should be put in fixed assets?
In discussing the percentage of cash to invest in fixed assets, Areu emphasises that the decision is influenced by multiple factors. However, the most common approach to determining the allocation is through asset allocation.
He explains that asset allocation involves deciding what percentage of your overall assets should be allocated to short-term cash and long-term fixed assets. Essentially, the question revolves around how to divide your investments between liquid, short-term resources and more stable, long-term assets such as fixed investments.
Investment by age
The key factor in investment decisions is often based on your age and career stage. If you are in your 30s or younger, it is advisable to focus on long-term investments, like fixed assets, because you have the advantage of time to build wealth for the future.
In the short term, with a steady salary and job, your immediate financial needs are already taken care of, so you can prioritise long-term growth.
"For those below 50s, allocate the majority of your investments - around 60 percent - towards long-term assets, with the remaining 40 percent or less directed into short-term investments. This strategy emphasises the importance of focusing on long-term growth while having some flexibility with short-term assets," Areu explains.
However, if you are in your 50s or 60s and are approaching retirement, the recommendation might shift to considering more short-term investments to ensure liquidity and security as you get closer to retirement.
At around 60 years old, it is important to focus on managing risk in your finances. Since you may no longer have a salary in retirement, it is crucial to keep your money in safe, liquid assets that are easily accessible for day-to-day needs. This approach helps ensure you have funds readily available when you need them.
Some long-term assets can also be liquid, meaning they can be sold or accessed at any time, though often at a cost. Examples include bonds, which can be sold before maturity but may incur fees or price fluctuations.
Similarly, unit trusts, typically considered long-term investments, can be structured to allow for withdrawals, but if left intact, they serve as long-term assets.
Areu explains that some long-term assets are also liquid, such as bonds. You can sell a bond anytime, but doing so may come with a cost.
Similarly, unit trusts can be considered long-term assets. While they are typically structured as fixed investments, you have the option to withdraw or keep your money in the trust, thus structuring it as a long-term asset.
As you approach retirement age, your financial priorities should shift towards liquidity having easy access to cash. Many older individuals are "asset rich but cash poor," meaning they own valuable property or real estate but lack liquid funds to handle immediate expenses, such as healthcare. This can be dangerous if they need cash urgently but can not access it.
When younger, focus more on building assets, even if cash flow is not as high.
However, as you age, liquid assets are crucial for financial stability.
As you age, especially in your fifties, sixties, and beyond, focus on low-risk, highly liquid assets. These investments, such as short-term cash or near-cash options, carry very low risk and are easier to access when needed. This ensures financial security in later years.
Do not invest more than 40-50 percent of your money in long-term, fixed assets due to their low liquidity. As you age and your salary ends, it is crucial to have assets that provide easy access to cash for emergencies, such as medical care.
Additionally, in later years, it is important to have investments that generate regular income, such as bonds or unit trusts, to replace your salary. The focus should be on maintaining liquidity while ensuring a steady income to stay financially comfortable.
