Paul Clitheroe
Paul Clitheroe

Hoarding cash doesn't work

A RECENT Reserve Bank of Australia (RBA) study looked at the lifespan of Australian bank notes. What it found in the process, is that some Australians are hoarding vast quantities of cash.

The RBA's research revealed that most bank notes have a tough life. The common denominations - $5, $10 and $20 notes, only last for around five years. After this, notes are returned to the Reserve Bank and destroyed. Even $50 notes are ready for the scrap heap after 10 to 15 years. 

It's when we look at $100 notes that the picture changes radically. Unlike other denominations, the RBA found fewer than 10 per cent of all $100 notes ever printed have worn out from use.

According to the RBA this is because "$100 banknotes are generally held by the public as a store of value." Put simply, we have a tendency to hoard $100 bills.

This research is backed up by a 2014 study by the Australian Payments Clearing Association (APCA). It found the nation's households are collectively hoarding around $1.2 billion in coins and a whopping $10 billion in bank notes.

In fact, it's estimated that at least 500,000 of us hoard significant sums of money at home - an average of $20,000 per person among serial hoarders.

The same APCA report noted that our note-hoarding habits were confirmed during the 2009 Victorian bushfire disaster, when substantial quantities of singed banknotes (most in neat bundles) were returned to the RBA for replacement. Presumably, more seriously burnt banknotes simply went up in smoke.

Hoarding cash is fine - if it's in a bank account. But stockpiling bank notes doesn't just increase your exposure to loss through, say, theft, or fire, it also means missing out on investment returns.

Moreover, the purchasing power of cash declines over time thanks to inflation.  So it makes good sense to get any spare cash out from under mattresses and put it to work.

Your money could earn up to 3.5% in a savings accounts, or if you have a home loan, using hoarded cash to make a lump sum payment could see you earn a tax-free return equal to your loan interest rate.

Another option is to tip the money into your super, or consider using stashed cash to invest in a managed fund - it could be the start of a healthy investment portfolio.

If you're not convinced, bear in mind that the world's wealthiest people didn't get that way by sliding notes under their mattresses. They make every dollar work hard. For more ideas on building wealth, take a look at my book Making Money.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.