Holding some cash in reserve is part of any sound financial plan. Having accessible savings for unexpected events provides stability and peace of mind. However, leaving excess cash sitting on deposit for long periods is not always the most effective strategy. In Ireland today, there is approximately €170 billion sitting in bank deposits. The majority of this cash is held in demand deposit accounts that generate a negligible return. At the same time, inflation has averaged between 2% and 3% in recent years. While that may seem modest, its long -term impact on an individual’s real purchasing power is significant.

The Hidden Impact of Inflation

Inflation gradually erodes the real value of money. For example, €100,000 held in cash with inflation at 2% would fall to around €82,000 in real terms over 10 years. Over a 20-year period, that same €100,000 would be worth less than €70,000 in today’s terms. These are conservative assumptions, yet they highlight a simple reality, leaving cash in low yielding deposit accounts is not risk free its real value over time is being eroded.

The Role of Long-Term Investing

By contrast, investing can offer the potential to grow wealth over the long term. Looking at global equity markets, €100,000 invested over the past 10 years could have grown to approximately €325,000. Over 20 years, that same investment could have reached €565,000. This difference illustrates the power of investing in financial markets along with compound interest, where returns build on previous returns over time. It is one of the most effective ways to grow capital and support long term financial goals.

Balancing Cash and Investment

This is not to suggest that cash has no role in a financial plan. A level of liquid savings is essential for short term needs and financial resilience. The key is balance. Holding too much in cash for too long may result in missed opportunities for growth, particularly in an environment where inflation continues to reduce purchasing power.

Important Considerations

It is important to recognise that investing involves risk. The examples above do not take account of fees. Past performance is not a reliable guide to future performance, and the value of investments can move both down and up.However, they do demonstrate how financial markets, combined with a disciplined long term approach, can support investors in achieving their objectives.

Conclusion

Taking a structured approach to managing cash and investing for the long term can make a meaningful difference to financial outcomes over time. While every investor’s circumstances are different, ensuring that you work with an experienced investment  advisor to ensure your money is working in a way that aligns with your goals, time horizon and appetite for risk is a key part of any effective financial plan.

Written by John Mullane, CIO, Cantor Fitzgerald Ireland