I started investing during the pandemic (I know, very cliché, but I had time on my hands), and I loved it.
I’d always kept my savings in an easy access account, until I realised they weren’t working as hard for me as I’d have liked.
Sooner or later, all my savings ended up in investments. And as it turns out, that wasn’t helping me to reach my savings goals, either.
Why?
Because I wanted my savings to do different things for me. I just wasn’t sure, at the time, how to make that happen.
And that led me to a very important bit of self-discovery. Why did I think saving meant all or nothing? One or the other? But also, how do I save and invest and make it work for me?
Here’s what I discovered, and how I changed my approach:
1. What is the difference between saving and investing?
When we talk about saving, we usually mean money we put away that we can get to easily. Like in an instant access account. Or, in a fixed rate account. This is where you usually lock your money for a period of time, to get a better interest rate. You may be able to take money out of a fixed term account if you really need to. But different providers will have different withdrawal terms, fees and charges if you do take out any money. So, it’s best to check with your provider before you take any money out.
With investing, on the other hand, you’re still putting your money away. But you’re typically doing it for much longer. And you don’t have a guaranteed interest rate.
This is because with investing, you’re putting money into the stock market. So, your growth is linked to the performance of your investments. Which has some risk. This is because the value of your investments can go up and down, so you may get back less than you paid in.
But there’s ways to reduce risk. Such as: investing for longer and spreading your investments out (known as diversification).
When I started investing, I decided to invest into a fund. It meant that someone else was making sure my investments were diversified.
It also gave me time to take stock (no pun intended) and think about when I would need to access my money. As well as what I needed to access my money for.
I realised that I could split this into three different time frames. And then match those time frames to saving and investment accounts.
Which also led me to discovery number two...
| When do I need it? | How many years do I want to save for? | What type of savings pot is this? | What might I use it for? | Where could I put my money?* |
|---|---|---|---|---|
| Need it quick | 0-1 | Emergency savings pot | Emergencies only: boiler breaks, car repairs, emergency vet bill after your dog eats your laundry (true story) | Virgin Money Access account |
| Need it later | 1-5 years | Short-term savings pot | Holiday, home improvements, moving house, landscaping the garden in silent competition with the neighbours | Virgin Money One Year Fixed Term account or a Cash ISA. |
| Need it in the future** | 5+ years | Long term savings pot | Supplement retirement, kids’ school fees, round the world cruise, the sports car you’ve wanted since your early 20s | Virgin Money Stocks and Shares ISA |
*In this table, I’ve focussed on Virgin Money accounts. You may already have accounts with other banks or providers that offer a similar service. It’s best to check with them that your saving goals are being met.
** My longest-term savings pot is my pension. This could be the same for you. I pay into my pension through my salary, so I’ve not included it in this chart.
2. Saving and investing are generally better together
You know the age old saying, don’t put all your eggs into one basket? Well, the same can be said for saving and investing.
So, if you’re wondering “should I save or invest?”, or “how can I invest and save at the same time?”, here’s what happened when;
I put all my savings into easy access savings:
- I dipped into it more often, so my savings were dwindling
- I had no clue what time frame I was saving for
- I didn’t get the best rates available
I put all my savings into investing:
- I had little emergency cash
- I was dipping into my investments when I needed to pay for unexpected bills
- I was worried about what my investments were doing day to day.
I balanced between saving and investing:
- I built up enough emergency cash
- I was able to get a better interest rate on my savings by locking my money into a fixed term account
- I stopped worrying about my investments, because they were in it for the long haul
Which led me onto discovery number three.
3. There are easier ways to save and invest
I need to save and invest in a way that feels like I’m reaching my goals. And more importantly, I don’t want to have to choose between one or the other. Here’s what that looked like for me:
First thing I did was build up my emergency cash savings.
Next, I tackled my short-term savings. They went into a fixed rate account. It meant I was getting a better rate, and I knew I was going to get a guaranteed return. And, not all my money was tied into investments.
Finally, I focused on my investments. I set up a direct debit that left my account every month whilst I sat back and didn’t lift a finger.
I wasn’t worried about not being diversified in my Stocks and Shares ISA, because I was investing in a fund. And if I really, really, really need to access my money, I could. Which led me to my fourth, and very last discovery.
4. The Four Pot Rule and how to make it work for you
If you were reading this and hoping at the end, I’d tell you what I think you should do, sorry to say I can’t.
But if you were thinking, “what’s a good savings to investment ratio?”.
I’ll share with you my Four-Pot-Rule; One for fun. One for emergencies. One for needs. One for future me.
Here’s how I break it down:
I save 30% of my monthly income after fixed outgoings into my fun pot. It's in a different bank account to where my monthly outgoings come from. This isn’t emergency cash but is purely to bring me joy. Dinners out, cinema tickets. Whatever I fancy.
I pop 25% of any non-fixed outgoings into my emergencies pot. This makes up the majority of what’s in my access account.
20% goes into my needs pot. Or, in other words, into a fixed-term saver. Yes, I do need that holiday to the Bahamas.
And 25% into my future me pot. This is my Stocks and Shares ISA. I know I’m not going to access this for the next 5 years or more, so I try and forget about this.
I also save into a workplace pension for future-me. But since that money comes out of my salary, I don’t add it to my after-outgoings savings pots. This is because it’s automatically done for me through my workplace.
It’s taken a few years for me to find the right balance. So, your balance could look very different to mine .
How you split your money, must work for you. Your needs now, and your needs in the future. But most importantly, it should give you clarity on where your money is, and where you want your money to be moving forward.