Cash Investments

Cash is one of the simplest investment categories to understand, but it still plays an important role in a well-balanced investment portfolio. In an Australian investing context, cash can include everyday savings accounts, high interest savings accounts, term deposits, cash management accounts and similar low-risk products held with banks, credit unions and building societies.

Cash investments are generally used for stability, flexibility and short-term goals. They may not offer the growth potential of shares, property or managed funds, but they can help protect your money from large market swings and make sure you have funds available when you need them. For investment novices, cash is often the easiest place to begin because the products are familiar and the risks are usually easier to understand.

What Counts as a Cash Investment?

Common cash-style investments include:

• High interest savings accounts: Bank accounts that pay a higher rate of interest than standard transaction accounts, often with conditions such as monthly deposits or limited withdrawals.
• Term deposits: Fixed-term accounts where your money is locked away for a set period, usually in return for a fixed interest rate.
• Cash management accounts: Accounts often used by investors to hold funds between buying and selling assets such as shares, managed funds or ETFs.
• Offset accounts: Mortgage-linked accounts that can reduce interest charged on a home loan, although they are not always thought of as investments in the traditional sense.

Why Hold Cash in an Investment Portfolio?

Cash can be useful because it gives you breathing room. If the sharemarket falls, property markets slow or unexpected expenses appear, having cash available can reduce the pressure to sell other investments at the wrong time. This is one reason many investors keep part of their portfolio in cash, even when they are also investing for long-term growth.

Cash can also help with planned expenses. If you know you will need money in the next few months or years, such as for a home deposit, education costs, travel, renovations or a business expense, cash may be more suitable than assets that can rise and fall sharply in value. ASIC's Moneysmart describes cash as a very low-risk asset class often used for liquidity and diversification, especially over short time frames of around 0 to 3 years.

High Interest Savings Accounts

A high interest savings account can be a good option when you want your money to remain accessible while still earning interest. These accounts usually allow you to add money regularly and withdraw funds when needed, although some accounts reduce the bonus interest rate if you make withdrawals or fail to meet deposit conditions.

When comparing savings accounts, it is worth checking the total interest rate, the conditions attached to bonus interest, whether the rate is introductory, and whether there are account fees. The highest advertised rate is not always the best choice if the conditions are difficult to meet. A slightly lower rate with fewer hoops can sometimes be more practical.

For more information, see ASIC Moneysmart's guide to savings accounts.

Term Deposits

A term deposit lets you invest a set amount of money for a fixed period, such as 3 months, 6 months, 1 year or longer. In return, the bank or financial institution pays a fixed rate of interest. This can be appealing if you want certainty about the interest you will earn and do not need immediate access to the money.

The trade-off is flexibility. Your money is usually locked away until the term ends, and early withdrawal may require notice, a reduced interest rate or other conditions. Moneysmart notes that term deposits are low-risk investments, but they are not always the best choice if you may need quick access to your funds.

Before opening a term deposit, compare the interest rate, term length, minimum deposit, when interest is paid and what happens when the term ends. Some term deposits automatically roll over into a new term, possibly at a lower rate, so it is worth setting a reminder before maturity.

For more information, see ASIC Moneysmart's guide to term deposits.

Flexibility and Liquidity

One of the main strengths of cash is liquidity. Liquidity simply means how quickly and easily you can access your money. A savings account is highly liquid because you can usually transfer funds almost immediately. A term deposit is less liquid because your money is committed for a set period.

This matters because investment returns are only one part of the picture. If all of your money is tied up in long-term investments, you may be forced to sell assets during a downturn or borrow money when unexpected expenses arise. Cash can act as a buffer, giving you more control over timing.

Many investors keep a separate emergency fund in cash before investing heavily in higher-risk assets. This is not exciting, but it is often sensible. A boring cash buffer can prevent very exciting financial problems later.

Safety and the Australian Government Deposit Guarantee

Money held in eligible accounts with authorised deposit-taking institutions, known as ADIs, may be protected under the Australian Government's Financial Claims Scheme. This scheme protects eligible deposits up to $250,000 per account holder, per ADI, if the institution fails.

This protection generally applies to Australian-dollar deposits with banks, building societies and credit unions that are covered by the scheme. However, it is important to check whether the institution is an ADI and whether your deposits are covered, especially if you are using a lesser-known provider or holding large balances across related banking brands.

You can learn more through APRA's guide to the Financial Claims Scheme and its list of covered authorised deposit-taking institutions.

The Main Risks of Cash

Cash is often described as low risk because the dollar value of your account does not usually move up and down like shares or property. However, cash still has risks that investors should understand.

• Inflation risk: If prices rise faster than your interest rate, your money may lose purchasing power over time.
• Opportunity cost: Holding too much cash for too long may mean missing out on higher potential returns from growth assets.
• Interest rate risk: Savings rates and term deposit rates can change as market conditions and official interest rates change.
• Access risk: Some products, especially term deposits, may limit how quickly you can withdraw funds.
• Institution risk: Deposits above the Financial Claims Scheme limit, or deposits with providers outside the scheme, may carry additional risk.

Cash, Inflation and Real Returns

The interest rate on a cash account is the headline return, but the real return is what matters after inflation. For example, if your savings account earns 4% interest while inflation is 3%, your real return before tax is roughly 1%. If inflation is higher than your interest rate, your money may technically grow in dollars while still buying less over time.

This is why cash is usually most useful for short-term needs, emergency funds and portfolio stability, rather than long-term wealth creation by itself. Over longer periods, investors often combine cash with assets such as shares, property, bonds and managed funds to improve the chance of growing their purchasing power.

Foreign Exchange Risk and Holding Funds in Australian Dollars

Most Australians naturally hold their cash in Australian dollars. For everyday spending, bills and local savings goals, this makes sense. However, the value of the Australian dollar can move against other currencies, and this can affect the real-world value of your money when you buy imported goods, travel overseas or invest internationally.

The Reserve Bank of Australia explains that the Australian dollar has a floating exchange rate, meaning its value is influenced by supply and demand in foreign exchange markets. Factors such as interest rate differences, commodity prices, global risk sentiment and Australia's trade relationships can all affect the exchange rate.

If the Australian dollar falls, overseas travel, imported goods and foreign investments may become more expensive in Australian-dollar terms. If the Australian dollar rises, Australians may find overseas purchases cheaper, but international investments may translate back into fewer Australian dollars. This does not mean ordinary investors need to trade currencies, but it does mean that keeping all funds in AUD is not completely free of global risk.

For readers wanting to understand this further, the RBA provides clear explainers on exchange rates and their measurement and the drivers of the Australian dollar exchange rate.

How Much Cash Should an Investor Hold?

There is no single right answer. The amount of cash that suits you depends on your goals, income stability, expenses, age, risk tolerance and investment time frame. Someone saving for a home deposit may sensibly hold a large amount in cash, while someone investing for retirement decades away may choose to hold a smaller cash allocation and invest more heavily in growth assets.

A common starting point is to separate short-term money from long-term money. Funds needed soon are often better kept in cash or similar low-risk assets. Funds that will not be needed for many years may have more time to ride out the ups and downs of higher-growth investments.

Comparing Cash With Other Investments

Cash is not better or worse than other investments. It simply serves a different purpose. Shares and property may offer greater long-term growth potential, but they can be volatile. Bonds may offer income and stability, but still carry interest rate and credit risk. Managed funds and ETFs can provide diversification, but their value can still rise and fall.

Cash sits at the defensive end of the investment spectrum. It can help preserve capital, improve flexibility and reduce stress during uncertain markets. The key is to use it deliberately, rather than letting large amounts sit idle for years without considering inflation, tax and opportunity cost.

Watch: Cash, Savings Accounts, Term Deposits and Cash ETFs

This video provides a useful Australian introduction to cash as an investment category, including savings accounts, term deposits and cash ETFs:

Related Resources

• Choose your investments - Moneysmart
  A beginner-friendly overview of different asset classes, including cash, shares, property and fixed interest.
• Savings accounts - Moneysmart
  Practical guidance on comparing savings accounts, interest rates, fees and account conditions.
• Term deposits - Moneysmart
  A plain-English explanation of how term deposits work, including interest rates, maturity and early withdrawal.
• Financial Claims Scheme - APRA
  Official information about the Australian Government safety net for eligible deposits held with authorised deposit-taking institutions.
• List of ADIs covered under the Financial Claims Scheme - APRA
  A useful page for checking whether a bank, building society or credit union is covered by the scheme.
• Drivers of the Australian Dollar Exchange Rate - Reserve Bank of Australia
  A helpful explainer on why the Australian dollar rises and falls against other currencies.
• Exchange Rates and Their Measurement - Reserve Bank of Australia
  A clear introduction to how exchange rates work and how they are measured.
• XE Currency Converter
  Calculate exchange rates from 200+ countries. Figures updated daily.

Articles About Cash Management:

A Fixed Interest in Cash (NineMSN Money, 24.01.2001)
Fixed-interest investments and cash are worthwhile components of any balanced portfolio, and no investor should ignore the stability and liquidity offered by this asset class.

A Matter of High Interest (BBC News, 20.11.2000)
The consumer and small business banking market is rapidly shifting from one based on cheques, cash and regular trips to the local bank branch, to an increasingly electronic system. Online banking saves banks a great deal of expense in overheads and wages - but have they been passing these savings on to their customers?

Important Note

This page provides general information only. It does not take into account your personal objectives, financial situation or needs. Before making investment decisions, consider whether the information is appropriate for your circumstances and seek licensed financial advice if needed.