By Ingrid Micallef, Head – Products and Marketing at MeDirect
Article published on the Malta Business Weekly

There is no doubt that we are now in an era of higher interest rates. The global acceleration in inflation which followed the Covid pandemic has forced central banks all over the world to raise interest rates with unprecedented rapidity. While, for many, these increases could mean higher debt servicing costs, for savers and investors, it has once again made cash an asset worth serious consideration. While there can be no doubt that Government Bonds, high-yield savings accounts and fixed term deposits have become much more attractive in recent months, it is still worth thinking carefully about how much of your portfolio should be in cash.

What do you need cash for?

It’s certainly useful to have some cash available. Life is unpredictable and you never know when an unexpected expense is going to crop up. Whether it’s replacing your fridge or something more serious like losing your job, having enough funds to cover your basic living expenses for three to six months is important. Make sure you keep some cash in an easy access account that also pays interest, such as MeDirect’s MeMax Savings account which offers an interest rate of 2 per cent per annum, paid monthly. That way, you can earn a little extra money while still being able to use it immediately should the need arise.

It’s also a good idea to keep cash if you are saving up for something specific like buying a new car or an even bigger expense like a new home. Saving up for these purchases normally takes a few years but the process has been made slightly easier in a higher interest rate environment. Opting for fixed term deposit account in this scenario will give you access to better rates, such as the 2.75 per cent MeDirect is currently offering on its 1-year account, and therefore higher returns while also locking in your money so you can’t be tempted to spend it on something else in the meantime. While returns on cash savings products are never going to be spectacular, you will make a return with zero risk to your capital which in Malta is protected by the Depositor Compensation Scheme up to €100,000. If you have a specific goal in mind, it’s best to work methodically towards achieving it rather than risking your hard-earned money on less secure investments.

Whether, or how much, cash you need can also depend on what stage in life you are. It makes sense, for example, for those who have retired to keep more of their portfolio in cash or short-term securities. This protects them from short term market volatility which could result in significant losses at a time in life when they are unlikely to be able to recover. It’s also a time when you want to have access to your money to be able to enjoy life, not have it locked away in a long-term investment.

The limits of cash

While holding some cash and short-term securities is always a good idea, there are limits to how useful this is, especially if your investment time horizon is more long term. If retirement is something that is still years away for you, then you should be thinking about investing in assets that have higher growth potential, even if these can be more volatile. While it’s true that you can be negatively impacted by a market downturn, the fact that you have time on your side means there are also plenty of opportunities to benefit from periods of growth. Historically markets have always had more up years than down years so over time this should work in your favour. Investing small sums regularly, rather than in lumps sums, can also help to cushion your portfolio from any downturns while still enjoying returns that are higher than cash.

As Malta’s first digital bank, MeDirect’s mission is to give customers the tools and information they need to manage their money with confidence and autonomy. To do this, we have developed a market leading online platform and mobile app through which customers can manage their savings and investments with ease. Becoming a MeDirect customer is straightforward and can be completely entirely online by visiting https://onboarding.medirect.com.mt/

MeDirect Bank (Malta) plc is licensed to undertake the business of banking in terms of the Banking Act (Cap. 371) and investment services under the Investment Services Act (Cap. 370). The Bank is a participant in the Depositor Compensation Scheme established under the laws of Malta.