Recently we looked at this list of 15 things put together by John Rampton which may be holding you back from financial freedom. The list is :
- Living Above Your Means
- Lack Of Determination
- Neglecting your Health
- Purchasing a Home
- Relying on One Source Of Income
- Wasting Valuable Time
- Not Acting on Your Ideas
- Not Reading
- Fear and Negativity
- Not Setting Goals
- Avoiding Routine
- Not Collecting Assets
- Spending Time with Toxic People
- Failing to Follow to Allocate your finances (70/30 rule)
- Not Having A Mentor
Today we are going to look at the twelfth - not collecting assets ...
Cash is King - or is it?
Cash is essential to build into any financial plan - it enables us to retain our discipline and to continue to make informed logical financial decisions when investment markets may be under pressure. It also enables us to have the freedom of choice - whether it be a career change, an extended break from work or a multitude of other things.
What cash tends not to do, is to keep up with inflation - the cost of living. This is where the peril of not collecting assets comes in.
When we refer to assets we mean things which will grow in value over time, retaining and exceeding their original purchasing power. On the premise that this is our definition of an asset, anything else, must, by default, be a liability - something which devalues or holds us back (I can imagine all the accountants looking rather bemused at that theory).
A car bought at £15,000, then valued at £8,000 4 years later has lost you money, so was that an asset or a liability? Assets grow in value over the long term, and this is when, as financial planners, we turn typically to investments - things which should increase in value, quicker than inflation over time.
Those who hold everything in cash, or other devaluing items risk losing out, risk their financial stability, and ultimately, risk their happiness by not being able to do what it was they wanted to. Similarly, those who hold nothing in cash, run the risk of having to make decisions at a less than opportune time.
Take any model, and run £100k in cash over 20 years against £100k in a well diversified investment portfolio, and there is an eye opening difference. The key is to get the right blend for you and your life, and that is best done with the help of a good financial planner using financial forecasting and scenario modelling tools.
As an individual, what can you do?
Look at your cash holdings and where you save
Once you have enough of a safety net (everyone is different) look for options to accumulate assets
Beware of biased information (much of it out there is)
Discuss these options with an expert - your first thoughts (or the genius in the pub) may not be the most up to date information
Start accumulating assets
Ask any (good) financial planner to model the difference over 20 years between holding spare money as cash or investing it, and the graph will blow you away.