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Safety net and Savings pot

Making your money go further
Jopo1
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Safety net and Savings pot

#397790

Postby Jopo1 » March 21st, 2021, 11:04 pm

Hi, I wasn't sure the best board to post this on but thought this might be a good place to start. If there's a better place, please let me know where to x-post.

I'm starting a family budget and we need to decide where to save our pot of money.

This pot comprises:
-safety net of 6 months of living expenses
-some expenses we will definitely spend in the year eg holiday, house maintenance, medium size house upgrade project
-some savings towards expenses we will need to fork out in the next 3-10 years eg car, boiler, roof (we're calling this the calamity fund!)
-income tax accrual

We know we need to keep some in cash, such as for the holiday, and house stuff, and 2-3 months of ready expenses in case we can't work.

But cash earns a pittance and most savings accounts seem to have rather low maximum savings so we'd need to spread the cash around 10 accounts to earn 1% on it so we don't want to keep all of it in cash.

We're considering putting a portion of our calamity fund and safety net in our S&S ISAs. We are earning steady rates of return on our investments now, and by not needing it instantly (due to having a cash savings) we can time when we take it out so have the luxury of waiting to sell the S&S at a high point. Our investments are mostly in index tracker funds with a good spread of sectors and geography so hopefully there will always be a good price to be had on one or 2 of them.

Is this a good plan? and if so, what proportion should be keep in cash and what proportion should we invest?

Thanks for reading ;)

Jopo

GrahamPlatt
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Re: Safety net and Savings pot

#397792

Postby GrahamPlatt » March 21st, 2021, 11:07 pm

“we can time when we take it out so have the luxury of waiting to sell the S&S at a high point”
If your time horizon is >= 10 years, then... maybe. But you will have some income meanwhile.

Jopo1
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Re: Safety net and Savings pot

#397801

Postby Jopo1 » March 21st, 2021, 11:28 pm

GrahamPlatt wrote:If your time horizon is >= 10 years, then... maybe. But you will have some income meanwhile.


Just to check I understand...do you mean that the value of our funds might fall so much that they take 10 years to recover so we might still lose money with this plan?

We'd invest monthly to spread the risk, and what ever we put each year in would be a very small proportion of the existing ISA portfolios that we have, so if we did have to sell, well, it could be a part of the portfolio that we'd already earnt lots of money on rather than the new investments.

If you think that's a high risk, what alternative would you suggest? Keeping the cash at 0% interest and being eroded by inflation?
I don't know of any other options.

Thanks

Jopo

GrahamPlatt
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Re: Safety net and Savings pot

#397813

Postby GrahamPlatt » March 22nd, 2021, 12:53 am

I just mean that you should have a long term view. Investments (of whatever stripe) rise & fall in value.
For my part, retired these past ten years, my capital has more or less kept pace with inflation. At times it may have outstripped inflation (& by implication vice-versa). Should I have sold at that point?

vrdiver
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Re: Safety net and Savings pot

#397814

Postby vrdiver » March 22nd, 2021, 1:15 am

For planned expenditure < 5 years, I personally would avoid the stock market or other investments where the price is a variable. What you lose out on by missing out on market growth, you gain by not being a forced seller when one of your "calamities" hits.

Imagine a world where you lose the ability to earn (lost job, illness etc.) and at the same time the market tumbles; your "2-3 months cash" just turned into 4-6 weeks cash overnight...

For discretionary spending that's further than 5 years away, OK, invest, but be prepared to postpone spending if things don't work out. As the date comes closer you ought to be converting to cash (or cash equivalent) so as to avoid any bad market timing at the point where you want to spend the cash.

A safety net or emergency fund that shrinks by whatever the market shrinks by, just as you need it, could be an expensive decision if you did become a forced seller. If that happened early on, then there wouldn't be any growth to offset the loss. I appreciate it's hard to look at cash doing nothing whilst the market rises, but mentally it's important to separate investment money from emergency money; they have two very different jobs to do.

Imagine I offered to give you double your house insurance premium this time next year, if you roll a 2,3,4,5 or 6, but you have to give me 1/2 the premium if you roll a 1. Also, you have to give the house insurance premium to a solicitor to hold for the year instead of insuring the house.

It's a good deal, you'll very likely make double your money, and when was the last time you claimed on your house insurance anyway? But, should things not work out, are you prepared to accept the consequences? If you are, then it's no longer "calamity money", it's just more investment money and you've decided you're comfortable with that level of risk (of being a forced seller).

One home for cash you may want to consider is premium bonds. They can be sold at any time and will pay a little under 1% in prize money (maybe less, or, unlikely but possible, more).

In summary, decide what job the money is there to do, then put it where it can do that job without having its legs cut out from underneath it at the critical moment.

VRD

Jopo1
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Re: Safety net and Savings pot

#398136

Postby Jopo1 » March 23rd, 2021, 12:16 am

vrdiver wrote:For planned expenditure < 5 years, I personally would avoid the stock market or other investments where the price is a variable. What you lose out on by missing out on market growth, you gain by not being a forced seller when one of your "calamities" hits.....



Very thought-provoking, thank you VRD.

The thing is we have been sitting on a huge amount of cash for 8 or so years because my OH just doesn't want to invest it in case we need it, and I have just watched it deflate in value over that time. We've been spending quite a bit below our means with a view to having the cash available should we need it and not have to put too much effort into budgeting.

It's just hard to get my head around all the planning we need to do right now!

Jopo

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Re: Safety net and Savings pot

#398265

Postby vrdiver » March 23rd, 2021, 11:53 am

Jopo1 wrote:The thing is we have been sitting on a huge amount of cash for 8 or so years because my OH just doesn't want to invest it in case we need it, and I have just watched it deflate in value over that time.

That is one of the hard things about having emergency funds and no emergency - it can feel like a real wasted opportunity. If only emergencies could be scheduled efficiently ;)

Seriously though, that inflation loss can be considered the "insurance premium". Question is, are you getting the right policy?

If the cash pile is "huge" you might want to re-evaluate how much of it you need on instant access, and how much of it you would need within 1, 3 or 6 months, and let that dictate how constrained you are with what you do with it. I'm still not a fan of putting emergency money into an asset that can potentially become worthless (i.e. single company share that goes bust) but it might be reasonable to look at fixed interest or short dated gilts if they would help leverage your cash.

A final tip, which is of course just-too-late, and depends where you shop. A lot of supermarkets have Christmas savings cards, e.g. Asda, Tesco etc, where you put money on their card and they give you a bonus. The bonus rate is usually much better than a bank deposit rate. If you can work out what you'd normally spend in each supermarket chain, then you can transfer a chunk of your emergency pot to their schemes, knowing that you'd be spending that money on food anyway, should an emergency occur. Should it not, you'll be spending down the supermarket credit whilst saving your grocery money to replenish the emergency fund (ready for a repeat of the process next year).

For more detail, see https://www.lemonfool.co.uk/viewtopic.php?f=14&t=25682&p=347925&hilit=Christmas#p347839

VRD

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Re: Safety net and Savings pot

#398276

Postby Urbandreamer » March 23rd, 2021, 12:14 pm

Jopo1 wrote:The thing is we have been sitting on a huge amount of cash for 8 or so years because my OH just doesn't want to invest it in case we need it, and I have just watched it deflate in value over that time.


There really are a couple of questions.

Is the amount greatly in excess of any sensible emergency fund? If so then clearly the excess could be invested.
Does your OH regard any investment as a gamble and any investment losses as unacceptable. Sure that is not the stated reason to not invest, but could be the real reason.

Make no mistake, if you invest the money, you will at some point see the value of your investment fall. That fact seems to put some people off the idea, while others just shrug and take the view that investment is for the long term.

Dod101
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Re: Safety net and Savings pot

#398292

Postby Dod101 » March 23rd, 2021, 12:59 pm

I would look to invest quite a lot of your calamity fund. It is unlikely that all of the calamities are going to occur in the same year and I guess a car purchase for instance could be postponed (just as I did last year for example) OTOH if your boiler stops working and it is uneconomical/not possible to repair it then you need a new boiler and the cash to buy it and get it fitted. So that to me would be the cash you need to have in this fund. Invest the rest or most of the rest. You then have six months of living expenses, cash for immediate needs (holidays and house stuff) and funds for a new boiler which may come in all to around 9/12 months income? Above that I would be inclined to invest because of course these need not be truly separate pots in jam jars and the actual cash can be used for any of the items listed. You would probably get away with less cash but it depends how you both feel about it.

Do a check on all of this thinking at least every 12 months and just make sure you are comfortable with that. I sort of do that myself but as I am retired with no dependents I can be very much more flexible. Peace of mind though is more important than earning extra in the stock market so be sure that you are both happy, and do not forget that as others have said, stockmarkets can fall quite dramatically very quickly. See one year ago.

Good luck

Dod

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Re: Safety net and Savings pot

#398351

Postby richlist » March 23rd, 2021, 4:39 pm

There are alternatives to traditional savings and investments and in the current low interest rate age they are worthy of consideration. You need to be a little entrepreneurial, you don't need to risk large sums of money & most people can do it.

Here are a few of the many opportunities............
* In summer buy heaters, nobody wants a heater in the summer, pick up cheap, sell for a good profit in winter.
* Do the opposite in winter, buy cooling fans and air conditioners, sell in summer.
* You can do the same with virtually any seasonal consumer item e.g. lawnmowers, garden tables & chairs etc etc.

The returns will beat anything, anywhere else.

Jopo1
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Re: Safety net and Savings pot

#398481

Postby Jopo1 » March 23rd, 2021, 10:34 pm

vrdiver wrote:
Jopo1 wrote: A lot of supermarkets have Christmas savings cards, e.g. Asda, Tesco etc, where you put money on their card and they give you a bonus.

VRD


I've never come across those before, thanks for the tip!

Jopo1

Jopo1
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Re: Safety net and Savings pot

#398486

Postby Jopo1 » March 23rd, 2021, 10:41 pm

Dod101 wrote:It is unlikely that all of the calamities are going to occur in the same year and I guess a car purchase for instance could be postponed (just as I did last year for example) OTOH if your boiler stops working and it is uneconomical/not possible to repair it then you need a new boiler and the cash to buy it and get it fitted. So that to me would be the cash you need to have in this fund. Invest the rest or most of the rest. You then have six months of living expenses, cash for immediate needs (holidays and house stuff) and funds for a new boiler which may come in all to around 9/12 months income? .....Dod


More excellent advice, thank you

I think I'm struggling to get my head around the planning of:

-How much can we afford to spend on a holiday and doing up the living room this year?

-How much do we need to put by for the known calamities that will happen in the next 10 years (my car is 9 years old, hubbies' cars are 18 years old, but as he has 2 he can afford to lose one without rushing to replace it!!)

-How do we track that and allocate it when cash is spread all over the place?

-How do we make sure we have enough long term savings to retire on?

So that's 3 pots to manage plus the general day to day expenses. I started using Moneyhub yesterday and it's helping me get some clarity on those questions.

Jopo

Jopo1
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Re: Safety net and Savings pot

#398487

Postby Jopo1 » March 23rd, 2021, 10:42 pm

richlist wrote:There are alternatives to traditional savings and investments and in the current low interest rate age they are worthy of consideration. You need to be a little entrepreneurial, you don't need to risk large sums of money & most people can do it.

Here are a few of the many opportunities............
* In summer buy heaters, nobody wants a heater in the summer, pick up cheap, sell for a good profit in winter.
* Do the opposite in winter, buy cooling fans and air conditioners, sell in summer.
* You can do the same with virtually any seasonal consumer item e.g. lawnmowers, garden tables & chairs etc etc.

The returns will beat anything, anywhere else.


That's a business idea rather than savings and investments though.

Jopo

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Re: Safety net and Savings pot

#398505

Postby Urbandreamer » March 24th, 2021, 12:02 am

Jopo1 wrote:I think I'm struggling to get my head around the planning of:

-How much can we afford to spend on a holiday and doing up the living room this year?

-How much do we need to put by for the known calamities that will happen in the next 10 years (my car is 9 years old, hubbies' cars are 18 years old, but as he has 2 he can afford to lose one without rushing to replace it!!)

-How do we track that and allocate it when cash is spread all over the place?

-How do we make sure we have enough long term savings to retire on?

So that's 3 pots to manage plus the general day to day expenses. I started using Moneyhub yesterday and it's helping me get some clarity on those questions.

Jopo


Ah, the true work. Seriously this is too much work for me, or I suspect Dod to do. I dodge the issue. It's easy, if you don't have to justify why you don't do the work.

There is a really great and really BORING book that sets out 9 things that you need to do to achieve "Financial independance".

https://www.amazon.co.uk/Your-Money-Lif ... 860&sr=8-1

OK, let us make a start. Surely you know what you spent upon the things that you listed. After all you point out that the situation has been going on for eight years. You MUST have eight years of records. No? Well I honestly didn't expect you to have.

Seriously it is worth doing at least that once, or for a few years. You soon get an idea about your spending. I have kept records of what I spent on the car and at the supermarket. You should also include the things that I have little idea of, as my wife pays council tax, gas, electric and supporting a child at University. Past history of spending can give you a clue about future expenses. Though I confess that it's one of my faults and I regard it as a great luxury to not have to record or think of such things.

With a joint account and everything going through it, it is probably easy to simply download the info from the bank. I can't because I have no access to my wife's account (It's how we work). The upside for me is that I can invest how I choose.

With respect to investment:

We are a couple and our savings/wealth is joint. However we find it a LOT easier to not live in each others pockets. She has/had a thing about cash savings, while I love investing. That said, if she had felt that it was "her" money at risk she might have suffered from the vapours during the dot-com crash, the financial crash and last year.

It's a bit bracing to lose a years salary in a matter of months. It is however likely when you have managed to invest multiples of your salary. Or indeed worse, when you retire and will have no salary. If you rely upon a DC "pension" then you will eventually have to deal with it, even if you choose to ignore the fact until you feel a need to. Though you could of course just convert it to cash and buy an annuity, or even just try and live upon the cash.

Jopo1
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Re: Safety net and Savings pot

#398511

Postby Jopo1 » March 24th, 2021, 1:13 am

Urbandreamer wrote:Seriously it is worth doing at least that once, or for a few years. You soon get an idea about your spending. I have kept records of what I spent on the car and at the supermarket. You should also include the things that I have little idea of, as my wife pays council tax, gas, electric and supporting a child at University. .


We did this for a couple of years about 10 years ago. We lived on the knowledge for a while, then our lifestyle changed considerably along with careers, money, and having a kid. But we've been drifting along for years not having a clue where our money is going.

So 2 days ago I started using moneyhub which connects to all our accounts, cards, investments etc. It's actually amazing! I hadn't realized the benefit of open banking before, but it would have taken me weeks to download, collate and categorize the information in a spreadsheet, but it took just a few hours on the app.

I noticed there is a financial software board so I might pop along there and see what's what

Jopo

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Re: Safety net and Savings pot

#398527

Postby richlist » March 24th, 2021, 7:02 am

Jopo1 wrote:
richlist wrote:There are alternatives to traditional savings and investments and in the current low interest rate age they are worthy of consideration. You need to be a little entrepreneurial, you don't need to risk large sums of money & most people can do it.

Here are a few of the many opportunities............
* In summer buy heaters, nobody wants a heater in the summer, pick up cheap, sell for a good profit in winter.
* Do the opposite in winter, buy cooling fans and air conditioners, sell in summer.
* You can do the same with virtually any seasonal consumer item e.g. lawnmowers, garden tables & chairs etc etc.

The returns will beat anything, anywhere else.


That's a business idea rather than savings and investments though.

Jopo

I'm addressing your comments on savings returns/ poor interest rates. I'm pointing out that you don't have to accept 1% or less if you are prepared to think out of the box. If you just want to put your money somewhere safe that doesn't require you to do anything then you will have to put up with 1%.

stevensfo
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Re: Safety net and Savings pot

#399842

Postby stevensfo » March 28th, 2021, 5:07 pm

richlist wrote:
Jopo1 wrote:
richlist wrote:There are alternatives to traditional savings and investments and in the current low interest rate age they are worthy of consideration. You need to be a little entrepreneurial, you don't need to risk large sums of money & most people can do it.

Here are a few of the many opportunities............
* In summer buy heaters, nobody wants a heater in the summer, pick up cheap, sell for a good profit in winter.
* Do the opposite in winter, buy cooling fans and air conditioners, sell in summer.
* You can do the same with virtually any seasonal consumer item e.g. lawnmowers, garden tables & chairs etc etc.

The returns will beat anything, anywhere else.


That's a business idea rather than savings and investments though.

Jopo

I'm addressing your comments on savings returns/ poor interest rates. I'm pointing out that you don't have to accept 1% or less if you are prepared to think out of the box. If you just want to put your money somewhere safe that doesn't require you to do anything then you will have to put up with 1%.



Agreed. A prerequisite to investing is a control of all expenditure.

PS. Are there still places where you can get 1%?

Steve


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