Thirty four year old Jessie is married with two children, and one on the way. She and her husband recently moved to a new place where they purchased two properties with the proceeds from the sale of their former house.
A nice position to be in. And the only real financial problem they faced was where to invest their suprlus cash. Most people like Jessie, would automatically consider bank term deposits, the purchase of land and negative gearing.
In short, she was all at sea with much advice but unclear what investment route to take. Eventually, she decided she needed more time to think about various options. A wise choice. Better to think now than pay later. Nevertheless she still had $20,000 in cash sitting around doing nothing. To meet her immediate needs, she invested her money in 30 day bank term deposits. That way, she earned a higher rate of interest than an ordinary passbook account without losing access to her funds.
Most people use investment parking places. The features of the ideal parking place is access to funds, safety capital and a reasonable rate of return.
Keeping yourself liquid is a jargon for having sufficient cash funds, is important for both individuals and smart for business. It provides greater financial flexibility.
If you invest all your money in shares or long term fixed interest securities, you cannot act quickly if an opportunity presents itself. An undervalue stock might suddenly catch your interest, or an attractive property. Selling existing assets to buy another one could result in delay and cost. That’s why many advisers recommend that you keep five to ten per cent of your portfolio in cash.
Even if you do not have an investment portfolio, you may simply want to have access to your money if unexpected bills land on your doorstep, or if a regular payment such as school fees presents itself.
Small businesses need cash to ride the highs and lows of the business cycle. And as we shall see in future postings, they do not have to accept a pittance for puting their hard earned funds into a ‘parking place.’
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