Last Updated on January 15, 2024 by Ben
Numerous fallacies surround saving and investing, one of which is that they are identical, and in actuality, that needs to be more accurate. Here is the information you need to protect your financial future via saving and investing.
What would you buy if you had a little additional money in your pocket? Would you instead save it or invest it in something more lucrative? Choose carefully!
Putting money aside for a specified reason is saving. On the other hand, investing entails placing your money in something that will increase in value over time, so growing your wealth.
Let’s examine how saving and investing can work together to protect your and your family’s financial future.
What Benefits And Drawbacks do Utilizing Gold Have Over Using Cash?
Gold is a secure refuge that can also be used to save, even though cash reserves are good to have on hand. Why not maintain your money in both Cash and gold? There are many benefits to doing so.
At the height of the COVID-19 epidemic, the economy stalled, the stock market crashed, and there was uncertainty about how things would turn around. As a result, individuals have rushed towards Cash and away from riskier assets throughout the past year. Similarly, gold had unheard-of inflows in 2020, with global ETF holdings increasing by about 877t.
8 Reasons to Hold Gold
- The intrinsic worth of gold
Gold is a well-known asset that shields a portfolio of investments against specific economic shocks. The primary quality that makes owning and purchasing gold a good choice is its intrinsic value. As a rare commodity with numerous applications in technology and the arts, gold is valued. It is an effective portfolio stabilizer due to its composition and characteristics.
- Gold is a form of currency.
An excellent means of exchange is gold. At least 6,000 years have passed since the yellow metal was first employed as money. Since ancient times, it has aided commerce as a distinctive and resilient precious metal. Even today, you can quickly sell gold at a pawn shop or online.
- Gold can be divided.
Gold can be divided into smaller pieces since it is divisible, making it a suitable medium of exchange for lesser objects. Even while it can be trickier to split gold into smaller parts than to divide a currency, this is nevertheless a benefit that makes gold a powerful medium of trade.
Specialty gold objects like artwork, jewelry, or scrap gold do not fall under this category. Also excluded are gold stocks (i.e., shares of gold mining companies).
- Gold is robust.
Because gold bullion is resilient, it can withstand extreme weather conditions and won’t deteriorate over time. When in pure form, it never corrodes or tarnishes, and the priceless metal has existed for a long time.
- The scarcity of gold
A rare, valuable metal, gold is. Finding and producing it into completed goods is challenging (and expensive). In addition, the earth’s supply of valuable metal is limited. It holds in South Africa or the Middle East just as much as it does in New York City or the London Bullion Market Association (LBMA), thanks to the global nature of the gold market.
- When the economy is struggling, gold does well.
In times of economic or financial crisis, gold prices typically increase. Companies may not meet earnings expectations during a recession, and their stock prices may decline. Gold maintains its intrinsic value and purchasing power when the economy is struggling. In the meantime, when small enterprises collapse and unemployment increases, other asset classes can react negatively.
- Gold serves as an inflation hedge.
Inflation may result if interest rates remain low for an extended time and the economy is overflowed with Cash. Central banks have accomplished that by using quantitative easing (QE). A typical long-term inflation hedge that can lower portfolio volatility is gold.
- Gold helps to diversify a portfolio.
Because gold has a low connection to traditional assets like stocks and bonds, it makes for a well-diversified portfolio. It means that the rising spot price of gold tends to limit portfolio losses while stocks are falling.
Only a small percentage (often between 5 and 10 percent) of gold is typically allocated to retirement accounts because gold naturally does not increase portfolio performance. The precious metal, however, has a positive risk premium, which makes it a sought-after asset.
3 Reasons to Hold Cash
Despite the widespread use of credit cards, “cash is king” is a well-known adage in the financial industry. People may decide to hold onto a considerable quantity of Cash due to several positive aspects of Cash.
When the price of risky assets, such as stocks, is high and investors are not eager to pay a premium for these investments, holding Cash makes sense. Another factor is that confident investors, particularly retirees or those approaching retirement, may not resist the volatility when there are frequent and significant price changes in the stock market.
- Money is enduring.
Cash is a resilient kind of money, mainly when it is digital. The banking system also has money in the form of bank deposits, which are tracked in ledgers and accounts. They are tradable and transferable at any amount, making Cash divisible.
- Cash is low-risk
Users can earn interest on Cash maintained in a conventional or online bank. Consider this a prize for saving money as opposed to wasting it. Even though the lower returns compared to stock market investments, this can be a simple strategy to control inflation because there is essentially no risk involved.
Since Cash’s value doesn’t change in the short term, investors often increase their allocation during difficult economic times to reduce their risk in a shaky stock market. In this situation, some investors would opt to keep their money in alternative investments like gold; however, gold can occasionally fluctuate during an unstable economic climate.
- A liquid asset is Cash.
Cash is a liquid asset, meaning it can be converted with little loss of market value. Cash can be readily moved in and out as needed. Cash is a form of payment that can be withdrawn, deposited, or used as a trade. Cash is the ideal alternative for everyday transactions because of this.
Additionally, Cash might be used immediately to purchase additional assets if the situation is correct (i.e., when current market prices are low is a good time). Therefore, having enough money “on the sidelines” enables an investor to respond swiftly and adaptable to shifting market circumstances.
Why You Should Hold Both Cash And Gold
Some individuals think you can only trade gold or gold for money. Cash, gold, and other financial products can be included in a long-term investment plan (20 years or more), such as when you purchase stocks online. Finding the ideal mix depends on an investor’s objectives and risk tolerance.
It is essential to have quick access to Cash, and people should establish an emergency savings account to cover any potential unforeseen expenses. However, while holding too much Cash can be reassuring, it does not help you accumulate wealth. Whether it’s Cash, gold, property, mutual funds, or something else, you shouldn’t have all your assets concentrated in just one place.
Diversifying into an asset like gold is appropriate if people find themselves with too much Cash in their savings account to safeguard the value of their wealth over the long run. Gold has endured through the ages as a reliable asset with no relevance to the general stock market today (e.g., S&P 500).