A client of mine once told me that they had money that they had set aside for school fees in the next term and wanted to invest it in shares. What is wrong with that statement? They need the funds in the short term but yet wanted to put it in something where the value can fluctuate quite easily. This person can’t exactly go tell the school to give him a discount because shares have fallen. The goal of this money and where they were willing to save or invest it are completely mismatched. They actually need to keep it somewhere that is safe and where they can pull it out when they need it without losing value. They need to retain these funds in Cash investments.
Cash investments and the need for them are sometimes widely ignored as people concentrate on other investments that give higher returns such as shares and property do in the long run. But like my client, we do have needs that dictate that some portion of our money goes into cash. Anything you need money for in the short term i.e. one year or less should be kept in cash form. This is because you need to be able to access it quickly i.e. liquidity and you cannot risk the value of those funds falling below what you invested i.e. preservation.
There are various ways to keep aside funds in Cash. Cash does not necessarily mean funds in a current account and in fact I advise against keeping any money that you do not need on a day to day in a current account as you will be tempted to use it and it is not earning any interest. That various options you can use are:
Savings Accounts: This is a bank account held with the intention of saving. The accounts earn some interest. Money can be withdrawn when needed.
Fixed Deposit Accounts: You can place your money in the bank for a fixed period of time such as 1 month, 3 months, 6 months etc and return the bank will give you a certain interest rate. The longer you place your funds the higher the interest rate.
Treasury Bills (T-Bills): These are securities used by the Government to borrow money from the public for short term requirements. You can place money in T-Bills for either 91 days (three months), 182 days (6 months) or 364 days. T-Bill investments are done through the Central Bank of Kenya or agents such as banks and stockbrokers.
Money Market Accounts: A money market fund is a type of Unit Trust that ensures money is safe and can be removed with relative ease. Best of all gives you much higher interest rates than a savings account does. The Fund Managers of these money market funds pool money together and go invest them in a variety of bank deposits, treasury bills, short term treasury bonds etc. As an investor you benefit from the interest that these investments are earning the fund.
Many people find themselves with fixed assets but with no immediate liquidity. Before you tie up your funds ensure you evaluate what your short term requirements are and put aside the necessary funds in Cash Investments.
Waceke Nduati
The author teaches personal financial management. Find her at www.centonomy.com or on twitter @centonomy.