The pitfalls of hoarding cash at home
Tucking away cash at home may also be driven by either a distrust of banks or a desire to evade tax authorities who are tracking private assets – or both. (Shutterstock)
It is believed that billions of dirhams are stashed in cookie jars, hidden under mattresses or lying around in homes across the world.
People have the habit of hiding physical money. In the UAE alone, nearly four in ten people hoard more than Dh10,000, while 14 per cent are clinging to a huge stash, roughly about Dh50,000, according to a comparison site. In the UK, the Bank of England estimated that around £3 billion in coins and paper bills can be found in people’s homes.
Cash, after all is still king for many people. This became more pronounced recently, when thousands of Indians with accumulated paper bills queued up outside banks following an overnight ban on 500 and 1000 rupee banknotes. In the UAE, a number of expatriates walked into remittance centres to exchange the scrapped bills.
“There is probably quite a lot of cash lying around in people’s homes [in UAE] – as can been seen from what has happened to the demonetised Indian rupee. I would suggest this is because people don’t know what to do with their money. Banks are offering low interest rates, so why not store it ‘under the mattress’ instead,” said Natalie Storey, senior financial planner at DeVere Acuma.
“There is also a lot of uncertainty in the world at the moment: Brexit, [Donald] Trump coming to power, low oil prices, Syrian war... People are fearful what will happen to their money.”
Tucking away cash at home may also be driven by either a distrust of banks or a desire to evade tax authorities who are tracking private assets – or both. “As a result of the Indian government’s recent actions, and this cash-based mindset, now there may well be significant volumes of rupees in the UAE that are no longer legal tenders,” said Jonathan Rawling chief financial officer at compareit4me.com.
The inflation factor
While they may have some valid reasons for holding on to considerable sums of physical money, hoarders could also be missing out on opportunities to make better use of their hard-earned income. Financial advisors warned that sitting on stockpiles of cash is not only unsafe, it is also bad for financial health.
“One major reason not to hold huge amount of cash at home is because of fires. We have seen many fires break out in Dubai and the UAE in recent time. If you have all that money at home and you are one of the unlucky ones, there is no way to get that money back. Even if you have home insurance, you will be limited to the amount you will be able to claim back. Money in the bank is at least protected from this,” Storey pointed out.
Besides, cash at home doesn’t grow and its real value will just be eaten away by inflation. “Inflation in the UAE is high – around 5 per cent. Realistically, this figure is probably much higher. So if you hold that cash at home for too long, each year that money is depreciating and your buying power has reduced. Your money should be growing, or at least keeping up with inflation,” she added.
What other people do with extra cash
Unlike many expatriates in UAE, Anna isn’t much of a cash hoarder. Every month, she sets aside money for bills and other payments to be made and keep the rest in the bank. This arrangement does not only ensure she won’t lose her money out of the blue, she’s able to keep tabs of her monthly outgoings more easily.
“A huge chunk of my salary goes into saving. The money that I do keep with me is left in the bank and I use my cards wherever possible. It’s just a lot easier to [monitor how much money is] being spent when you don’t have physical cash with you in hand,” the non-resident Indian told Gulf News.
Jasmin from the Philippines does the same, citing that she has more chances of growing her wealth if it’s invested rather than left idle at home. “I Invest my money in properties, insurance, stocks and bonds, so there isn’t enough left to tuck away. I only keep about Dh1,000 in the bank for small purchases. As soon as the salary comes in, I keep it in the bank so I won’t get tempted to spend it.”
Another pitfall of storing cash is house theft. Having large amounts of money at home increases one’s vulnerability to robbers. On the other hand, money invested somewhere else, like insurance policies, have very low probability of loss.
“Paper money is inherently vulnerable to loss or damage. While most home insurance policies cover money, there is usually a very, very low limit on this. Hence, if you have a fire or a flood, most of your cash will be gone,” said Rawling.
Where to keep your money
So, where should people keep their huge stash instead? For those who may be scared of putting their hard-earned money in stocks or other investment schemes that sound too complex, keeping cash in bank accounts would be the easiest route. “Deposit rates may well be low, but low is still better than nothing, which is what you’re going to make by keeping your money in a suitcase under your bed,” said Rawling.
If banks going bust is what you fear, there’s no need to worry about that if you’re in UAE. “A bank-run or bank closing is not a real threat in UAE, especially for local banks,” said Alp Eke, senior economist at the National Bank of Abu Dhabi.
Ensuring that there’s enough cash to withdraw from the bank in emergency cases is very important. It’s a good idea to keep about three to six months in cash of monthly expenditure. “So, if someone has a monthly expenditure (rent, bills, school fees, food) of Dh30,000, they should keep a minimum of Dh90,000 and up to Dh180,000 in liquid cash in the bank,” Storey advised.
“This money is there in case you lose your job or unexpected expenditure. Anything above this amount should be invested in the medium to long term to get real returns – to beat or at least keep up with inflation. Cash will never do this. There are many asset classes to look at. The main thing is to have a diverse portfolio.”
Some of the many pitfalls of hoarding cash at home:
1) Money can be lost to theft, burglary or fire.
2) It doesn't grow or increase in value.
3) Inflation will devour it, year upon year.
4) It can be taken out of circulation.
5) You could misplace it, or someone could accidentally throw it away.
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