We all need a cash stash - but not under mattress

INLSA

STASH: Its a good idea to have some cash hidden away, but preferably not in a box under your bed.

The current economic conditions show little change from three years ago, and this prompts me to discuss the importance of building a cash reserve.

Let’s look at what a cash reserve is; why we must have one; how large it should be; and how and where to stash it.

A cash reserve is an amount that gets stashed away and that should be available for us to access when times are tough.

I recall a story that when the euro was introduced in France there were nearly twice as many francs in circulation as was estimated.

This indicated that the French held cash in places other than their bank accounts, which I suppose is not such an unusual thing – I know my grandfather usually kept an amount of cash under his mattress, and I think this is probably what the French did with their francs, too.

I don’t believe there are many people still doing this today, because of fear of theft. Yet some still keep a safe to stash cash in.

You see, people do not trust the system entirely. Their fears are not completely unfounded when you consider how many people – those who do not have a stash of cash – are finding great difficulty in raising money from banks and other institutions.

We need to realise that good asset value is not necessarily good cash flow; and even when we have good asset value it will not necessarily secure us cash flow.

When an economy is flat, your assets will drop in value and this will not offer banks sufficient security. I recently requested a short-term overdraft from my bank and soon realised that the massive amount of value in property was meaningless – my bank chose to take the cash value on one of my policies as surety.

Banks have their own challenges to face. They appear to be less stringent on the affordability issues on loans and overdrafts than on repayment of bonds, as they can gain better interest return on overdrafts than is possible on mortgage bonds.

But I don’t believe the banks are sly; I think what we as consumers are experiencing is caused by the credit and consumer acts and their interpretation. We must provide our own stash of cash, as banks will not be able to help when times get tough.

The size of the cash stash will be determined by several factors: employment; interest rates; maintenance needs; education; health; and eventualities, to name a few.

On employment we have to ask “what if” questions such as: “what if I lose my job, how soon will I get another, will it pay the same as the current job?” Another question would be: “what if my employer has to impose an emergency recovery plan and my income is reduced by half?”

What will the impact be on car and bond instalments if interest rates increase by 2 percent? The answer to these questions will determine amounts and period of time, and by adding them together we will be able to determine how much money we should be stashing away for a rainy day.

The best place for storing your cash stash is not your mattress or under your bed, as it is bound to get stolen or pilfered by family!

Putting your hard-earned cash into a short-term savings account remains the safest option. Shares and gold may not offer enough instant liquidity and may have to be redeemed when prices are down.

An access type of bond can also be considered if withdrawals are not dependent on an application for a readvance, as the need for the re-advance can follow after a job loss and you will not qualify, as affordability cannot be proven.

A good rule of thumb is to have a stash equal to a minimum of six months of income. It may be difficult to accumulate this amount of money now but it is worthwhile to think about before you spend money on something new. Start your cash stash first.

l Deon Hattingh is a certified financial planner and a trainer. For more information, visit www.makingSENSE, or e-mail deon@makingsense.co.za.