An alternative way of looking at your financial affairs, providing you with food for thought.
Think of where you store your money as the larder, the fridge and the freezer.
The fridge is your everyday money, the money you need easy access to in order to pay bills, pay for food shopping and have some for rainy days.
The larder is your short to medium term savings, your emergency fund or your savings for a holiday in a few years’ time. Your short to medium term savings usually have a 3 – 5-year time horizon
The freezer is your long-term money, for your retirement or for your child’s education when they grow up or for that once in a life time holiday. Long term savings are usually more than 5 years in the future, but in reality, may be up to 30 or 40 years in the future.
It is important to look at your money as the larder, the fridge and the freezer as it will help you ascertain what each pound in our bank account is for and where it should be placed and ultimately, if that money could be better placed into one of your other financial pots depending on what you have earmarked it for.
The benefit of looking at your money in the three ways described above is that in reality the larder, the fridge and the freezer represent your immediate spending needs, your short-term savings and then your longer-term savings and investments and ideally you need all three to have a stable financial plan.
Your fridge should be things you need instant access to – for example just like you may use your milk daily, you probably also use your bank account daily. Therefore, your fridge is like an instant access account, whether that is a bank account or cash ISA. However just as you wouldn’t store your years’ worth of bread in the larder, you should most likely not have all of your money in cash, sat in your current account.
Too much cash, over and above your spending needs risks losing value due to inflation. Whilst some money is needed in your current account, and you swap investment growth opportunity for the security of having that money ready in your bank account, if in 20 years your savings were worth significantly less due to inflation, surely it would be better to have some in the larder or the freezer?
The larder should be your short to medium term savings. Think of these savings like to food you have in your Larder or kitchen cupboards; with items you may not use every day for example herbs or a tin of baked beans. When we equate the larder to financial products these could comprise of fixed rate ISA’s, short-term bonds, NS&I and more.
Here you should be willing to lock your savings away for a short period of time and in return you receive a small amount of reward in the form of slightly higher interest rates or return on your investment, however you ultimately still have access to your money in the short to medium term.
The freezer should be seen as your long-term investments. Long term investments need to be able to be put away for 5 years or more. So, your freezer is your pension fund, money you wish to grow or is earmarked for an event further down the line. This is the money that if left in cash would be worth significantly less in real terms due to inflation when you come to need the money in the future but also money that if invested for the long term can hopefully provide better returns by beating inflation and weathering volatility in the markets.
Why you need all three for a sound investment plan
By planning ahead, and having money in your larder, fridge and freezer, you will be planning simultaneously for your short, medium and long term goals.
Just like you store your bread, your butter and your ice cream in different places in your home, your money too needs to be stored in the right places for your future goals with each time horizon having a different aim, objective and plan.
By taking a look at your finances and committing any money you do not need per month to your medium and long term goals, you will find you have money for your different goals in life at the times in life when you need them.
If you would like to discuss your financial goals, aims and time horizons, speak to a Kellands adviser today. We are here and happy to help.
*Past performance is no guarantee of future results
Article written by Gemma Underwood, Financial Consultant at Kellands (Gloucester) Limited.