You need to be clear on how much you have coming in each month and how much goes out to cover bills. Once you have identified how much cash you need to keep in reserve, you can work out how much you can invest.
This might be as a lump sum or, more likely, a regular monthly amount. Let's just say that this is £500 per month. How should you invest this money? By which I mean, where should you invest; in what kind of account?
Choosing an Account
I am convinced that there are only really two kinds of accounts that matter for most people. The first is a pension and for many of us that will be available through our employer. If you're self-employed or don't qualify for a workplace pension for whatever reason, you can set up a personal pension. It doesn’t need to be fancy, just a simple online pension, There’s lots of choice.
The second kind of account is the ISA, but how should you split your £500 between those accounts? If you are just starting out, it is likely that there is quite some time before you can access money in pension, which is currently set to age 55.
It makes sense, therefore, to tilt the balance of your investing towards your ISA when starting out. So maybe split the investments £300 into the ISA and £200 into the pension to start with. Or £350 into the ISA and £150 into the pension – you decide. There is no right or wrong here; it's just a starting point.
As your ISA savings build up, begin to shift the balance towards your pension savings. You will eventually reach the point where you cannot imagine any eventuality where you would need to access both your emergency fund and the accessible money in your ISA.
That's the point at which you need to shift the emphasis to your pension. Pensions will always without mathematically thanks to the simple expediency of tax relief, where the government gives you money. Yes, pensions are taxed on the way out when you take an income from them one day – that's why having ISA savings is also important – but pensions are also incredibly flexible.
Divvy the Money up Between You
If you are in a relationship, it is important to maintain some kind of harmony and balance in your finances. Each couple will work this out to an extent which serves their unique needs, so make sure you spend time getting this right.
Tax is definitely a factor, so if one partner is a higher or additional rate taxpayer and the other is a basic rate or even a non-taxpayer, then this may well sway your investing decisions. The higher rate taxpayer will attract more tax relief on their pensions, and potentially get more benefit from an ISA.
But tax reasons aside, try to ensure that one partner isn't being unduly side-lined. In a divorce, everything is fair game anyway, but if this is a factor in your thinking then there are likely bigger issues at stake! Make your discussions open, honest and non-judgemental. Seek to work together towards your common goals. Optimised for tax, sure, but optimised for relational harmony too.