I’ve got several tips for you to make your investing a smooth and easy process, and I’ll be sharing them over the next couple of posts. First of all, we’ll look at the benefits of deciding in advance what you’re saving towards, and the importance of having a timescale in mind.
Work in Pots
In the olden days, people saved cash in jam jars or envelopes. It helped them compartmentalise the money they were putting aside for the future – this money is for Christmas, this is for the holiday next year and so on.
I think this is a very helpful way of thinking, because it makes for easy tracking of progress towards your goals. If you have one account for your one-day house purchase, another for saving for a deposit for a Buy-to-Let investment one day and another for your eventual retirement, that makes it easy to divvy up money between goal sets and keep this under review.
You can have a different investment strategy in each account too, reflecting the differing timescales of each goal. So how do you compartmentalise the money in the modern age of technology? There are a couple of ways you can do it:
Obviously having different accounts is the first. Pension for retirement, LISA for first-home purchase, general stocks and shares ISA for more accessible money you need before you can get at your pension money, or as a second-string retirement play – you get the idea.
But you can also partition up money within a single account if you prefer. You can do this by opting for a more cautious fund for your shorter-term goals and a more adventurous fund for your longer-term goals.
Let’s say you have a stocks and shares ISA and you’re paying £400 per month into it. You can tell the platform to invest £250 into the shorter-term fund maybe and £150 into the longer-term fund. Make sure you keep money you need in the next two to three years in cash, as it just isn’t worth risking this money in the markets.
If you need to divvy this money up, you can use different bank accounts, but some of the new challenger banks like Starling enable you to do this in-app. You set a savings goal in the app and it creates virtual pots for you – very cool technology. Use this method for your longer-term goals too, and start to think in terms of compartmentalising your money.
Establish Your Timescale
This is a key variable. You need to know how long your goals are in the future so you can do the maths easily. If you don’t know the timescale our if it’s a bit vague, take a stab at it anyway – you can always adjust your maths later.
Chances are you’ll have two basic timescales: retirement one day, and more near-term stuff. This latter part you’ll be able to break down further, as it is easier to see these timescales in greater focus. Don’t obsess about timescales for retirement, and spend your time establishing the nearer-term things in greater detail.