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Why Sitting on Cash Is Not Always the Best Idea?

  • Published On 19-Dec-2022
Why Sitting on Cash Is Not Always the Best Idea?

Why Sitting on Cash Is Not Always the Best Idea?

If seen through the lens of saving or owning money, cash holding seems to attract people from every walk and area. A study held in America showed that people prefer cash holding the most followed by real estate garnering 23% of the votes. Stock market earned 14% of the votes, while gold and other metals stood for 16%.

Although cash holding seems to be a lucrative approach towards saving and increasing their asset, it might not always be a good idea to follow. You may yield short term benefits through it, it may not prove to be beneficial in the longer run.

It was also found out that people with low education and low income were more likely to favor cash. On the other hand, people with multiple enterprises and higher education were more likely to invest either in real estate or in stocks.

Cash is most likely to be impacted by inflation among all the other approaches to build up assets. According to Mandi Woodruff, a study from BlackRock spanning over 80 years states that cash has an average annual return of 0.5% while stocks even after tax and inflation have yielded between 9.8% to 4.5% of the returns.

Impact of Inflation on Cash Holding:

Inflation impacts your holdings in a way that it reduces your purchasing power. In order to have the same purchasing power with your saved money, you ought to invest it. It can be explained in this way that you saved a cash amount of Rs.100 and you have received an annual appreciation of Rs.1 on it. But due to inflation the amount of prices and basic expenses has also gone up and now you need Rs.102 to cover these expenditures. That is why holding cash might not always prove to be a good idea.

Limitations of Cash Holding; a Case Study:

A case study research by Raja Mudassar Iftikhar illustrates how cash holding might not be a reliable approach towards saving at individual level and also for big companies and firms. The researcher analyzed the panel data of listed firms from KSE during 2010-2014. It was found out that these non financial listed firms withhold cash because of cash flow uncertainty. This approach proved to be effective in short term, but in the longer run firms' profitability on assets would be undermined by low liquidity management policies.

How Real Estate is the Solution?

Either you are looking to save money or undertake some endeavor, real estate can help you. During inflation, when the currency value goes down the value of your real estate property is likely to go up. Rental yields also increase.

On the basis of these facts, real estate investment is more promising and reliable than cash holding.