Creating A Plan For Saving

 

You are well-established in your job, you’ve got an income coming in and you’ve set up a budget mechanism so you know how much you’ve got to spare each month. How should you now go about saving?

I’ve found it helpful to think about splitting your cash into three pots: short, medium and long-term money.

PotsShort-term cash is to pay for things you will need within the next year or two. If you’re saving for a new dishwasher, a car or the deposit for a house, you want to know that the cash is there when you want to spend it, so you’ll not want to take any risks with this money.

Included in your short-term cash pot is your emergency fund. There are always unexpected bills that come at you from nowhere, and you’ll need some surplus to meet these, or at least take the sting out of them.

Sue and I allocate money to different accounts for different purposes. We have a holiday account, a replacement account (to pay for the next dishwasher) and a tax account (if you’re self-employed this is likely to be your biggest bill by far). We pay into these accounts each month, and we know how much we can spend on these items by how much is in the account. Many banks will set up ‘sub-accounts’ for you so you can manage your money in this way.

Medium-term cash is money you don’t expect to need at short notice, indeed you may not have any immediate ideas about what to spend it on, but you don’t want to tie it up for a long time. If you’re thinking of buying a house or starting a business or a family a few years in the future, or you just want to start accumulating money that is generating a better return, this is the place.

Whilst you don’t want to lock this money away, you do want to get better returns on it, and this means considering investments other than bank and building society accounts. The obvious solution is to use managed funds investing in stocks and shares and similar holdings, because these have the potential to grow faster than inflation and provide a real return on your money.

We’re not going into detail about these investments here, and there are some things you need to think about in creating your plan. As a general principle, though, you should be allocating about a third of your savings to this pot.

Your long-term cash pot should account for the remaining third. Think of this as your ‘Financial Freedom Fund.’ It’s money you’re never going to spend, although at some point you may begin to draw an income from it. The obvious first port of call for most people is to invest this money into a Pension Plan. There are two reasons to use a pension for at least part of this pot.

Firstly, pensions are just about the only remaining tax haven available to most of us. The generous tax reliefs they attract mean that, over time, your pension savings are likely to build into a bigger sum than equivalent sums invested elsewhere. Probably more important, though, is the fact that once money is inside your pension plan you can’t get at it. This sounds like a really big disadvantage, but take it from me, this is a huge, huge benefit.

Pension fund

Time and time again I sit down with people for whom their pension fund is their only significant asset. Despite their very best intentions, they dipped into and spent all of their other savings. I’ve found this to be universally true whether the individual works on the shop floor or is the person running the company. The only difference is that the company owner usually has more trinkets – a bigger house, car, holidays, etc – but their pension fund remains the most valuable thing they own by far.

Of course, if you have real self discipline and are focused tightly on your Financial Freedom goal, then this advice may not apply to you. I thought it didn’t apply to me, either. But I can tell you that, for me too, my pension fund is my biggest liquid asset. Enough said?

So here we have a simple framework on which to base your long-term savings plans. By splitting your money into these three pots you will have established some guidelines that can carry you forward over many years. There is still a lot you need to know to make the most from your money decisions, but now you have a track to run on.

This entry was posted in Uncategorized and tagged , by Andy Jervis. Bookmark the permalink.

About Andy Jervis

Welcome to my blog site. I've spent 30 years building a business - Chesterton House Group - designed to help people to achieve financial freedom, so that's my main interest and the core focus of my writings. True financial freedom isn't just about having enough money to do the things you want, it's about having a great relationship with money so that you can live in balance and get the most out of life. The best advice I ever had was to 'live each day as though it were your last, but plan as though you'll live forever.' I hope you enjoy the blog. Andy

1 thought on “Creating A Plan For Saving

  1. I found this blog particulararly helpful to help compartmentalise my own various accounts which will in return help my children to identify and set up there own short, medium and long term pots – Thank you Andy

    Like

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