What is it good for? Quite a lot, actually.
Cash is basically any money that you have instant access to. It includes money in bank current accounts, savings accounts, under the mattress, etc.
The benefits of cash
- Generally doesn’t lose value over the short term
- Extremely liquid (ie you can use it when you need to)
The drawbacks of cash
- Loses value over the medium- to long- term (due to inflation)
- Tends not to earn good rates of return (in Japan 0.1% is considered good)
What is cash good for?
You need to have some cash around to pay for unexpected expenses, from car repairs to losing your job and having to support yourself and your family until you get a new one. This is the emergency fund we talked about yesterday. The amount will be different for everyone.
Cash is also useful for taking advantage of investment opportunities (for example, it is generally a good idea to buy shares when they are cheap -ie during a stock market crash). If you don’t have any cash you can’t take advantage of the sale 🙂
The key thing here is that you need enough cash to meet your needs in an emergency and to allow you to invest if something good comes along, but not too much, because cash is not producing any income and slowly loses value over time. The opportunity cost of cash is the profit you could have made by investing it.
Foreign residents in Japan have an extra factor to think about: what currency to keep their cash in? Currency risk is the danger that you will lose money because of changes in exchange rates. If you have all your savings in Australian dollars, and the A$ suddenly crashes against the yen, how are you going to pay your rent and buy groceries in Japan? On the other hand, if the A$ gets much stronger against the yen, your savings will buy a lot more.
My personal take on this is as follows:
- all my earning power is in yen for the foreseeable future
- the yen is unlikely to get stronger in the future
As I can pay my bills with my salary, having my savings in other currencies is not that risky, so I can take advantage of the expected future devaluation of the yen. If I am wrong and the yen gets stronger, it will not be a serious problem. If I am right, I will benefit from the increased purchasing power of my savings when changed back into yen.
I keep a couple of months’ expenses in yen, and then the rest of my cash in US dollars, British pounds, and euros. This is really easy to do as my bank (Shinsei Bank) offers instant transfers between 14 different currencies within the same account. I’ll be taking a more detailed look at Shinsei in a future post, as it is the best bank I have found here in Japan.
The next post will look at property, and it will probably make a lot of people angry.