There are three key ‘pots’ of money that you should hold that will help you to manage a successful cash savings strategy.
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.
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.
Our Investment Surgery can help you plan your finances so that you feel more organised with your cash.
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 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.
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.