Cash Reserve
Your cash reserve should be money that you never touch. Money that you can put away that helps you to sleep at night knowing that if you ever need it in an emergency it is there, but otherwise it’s just a ‘feel good fund’.
The amount you choose to put away in your cash reserve is entirely up to you. There are no rules about this. It’s really just whatever feels right.
Some people like to keep it to round numbers like £10,000, £20,000, £50,000.
Others will consider what they spend over six months and hold that amount in cash as the reserve. Some might want the equivalent of three or six months’ gross income as a cash reserve.
The important thing to remember is that this money is put to one side and never touched. Only in emergency situations would it be relied upon.
Because you never know when you might need it you’d probably want to have it where you can gain easy access to it. But because you may never use it, or not for a long time, you’ll also want it somewhere you can earn some good interest on it.
Short Term Money
This is the most common pot of money that people have. Whether you have a cash reserve or not it is highly likely you have some money set aside for future expenditure, most probably because you have an income surplus each month.
You may know what that expenditure will be – a car, a holiday, a deposit for a new home, or university costs for your children. However it is also likely that you’re just setting some money aside for unknown future expenses.
Everything mentioned in the above paragraph is exactly what this ‘Short Term Money’ pot is for.
Ongoing expenditures like food, bills and everyday expenses are normally funded from your regular income.
Anything outside of that, the sort of one-off expenditures, can be funded out of this money.
Because this money can and probably will be spent or invested it is important to retain a cash reserve. This will ensure you always have a cushion, a sum of money that is always there for you.
Separate to the cash reserve the money you hold in this short term pot is most likely to be accessed sooner or later. So saving the money rather than investing would certainly seem to suit. Although for certain longer term objectives such as school or university fees it may be appropriate to consider lower risk investment options.
Once you have set aside what you feel is a comfortable amount in both the short term and the cash reserve pots then the excess money could be invested for longer term objectives.
Long Term Investments
Having put some money aside for your cash reserve and short term money, any excess you have can be invested for longer term objectives such as a retirement income or just a higher return than you can get in the bank on cash deposits.
Generally this is money that you will not require access to for the foreseeable future and so can leave it to grow over time.
Your pension or an ISA are tax efficient ways to save for long term investments and can be funded by monthly contributions or a lump sums as and when they become available. This is because any gains made on your investments within these are free of capital gains tax. Plus any contribution by you to a pension plan will mean the taxman pays a tax rebate straight in to your plan.
Once you have established the amount that is right for your long term investments both in terms of a total amount as it stands and the regular contributions you would want or need to add to it on a monthly basis you are ready to consider how your long term assets should be invested.
Structuring your investments is one of most important aspects of your long term portfolio. Having a sound investment strategy can make a big difference in how successful your investments are for you.
