I think people often get confused by the lure of high interest rates on savings accounts and investment returns from stock markets. After all, sex sells! Shiny ads promoting the ‘best this’ and the ‘best that’ are always going to be appealing.
Sometimes it helps to hear the basics and to know that you have your financial affairs under control.
There are a few very simple steps you can take to make sure your own financial planning is in order.
Step 1 – The Cash Reserve
Most people call this a rainy day account. This is the money you can keep to one side knowing that you don’t really intend on using it. There are no hard and fast rules as to how much this should be. Financial theory suggests six months worth of expenditure, but I normally suggest whatever makes you feel good. You could use Cash ISAs for this pot.
Step 2 -Short Term Money
Generally this is money kept in a savings or current account and is used to ensure you have enough money set aside for planned and unplanned expenses in the future. Again like the first pot of money it’s all about making you feel comfortable. If you want to keep a steady amount of cash in a current account to cover expenses, or save up for a holiday etc. then this would be the pot to do that within.
Step 3 – Long Term Investments
As well as taking care of your short term needs you should also have an eye on your long term future. As long as you are putting aside enough money to take care of your short term needs then there should also be some room to invest for the future. You could do this via a Stocks and Shares ISA and/or a Pension. Either of those is a great, tax efficient way to save for retirement.
That really is about it. If you follow those simple rules you will have a very flexible and well structured way of managing your money. mportantly you will only hold a handful of account in total which helps to keep things really simple and easy to keep on top of. I rarely see the need to have any more than a:
- Cash ISA
- Current Account
- Savings Account
- Stocks and Shares ISA