Splitting things up could help (Image: mladenbalinovac via Getty Images)
People contemplating launching a fresh savings routine or expanding their current one ahead of the new tax year in April might benefit from dividing their savings into distinct “pots”, an investments specialist has suggested.
Lucy Smith, an investment manager at Killik and Co, explained that a “helpful” approach to structuring savings involves creating an emergency fund containing readily accessible cash for unexpected circumstances.
Depending on personal circumstances and comfort levels, some people may wish to accumulate at least three months’ worth of expenditure in this fund, she noted.
A second pot could be designated as a “planned spend” fund, setting aside money for anticipated objectives within the coming years, such as purchasing a property, embarking on a major holiday or covering other significant life expenses.
Long-term “lifetime” savings that won’t be required for approximately five years or longer could form a third pot, Ms Smith recommended.
An expert has some simple advice (Image: Anthony Devlin/PA)
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She explained: “This is your pot of money where investing can play a key role as you can benefit from compounding over time since it is not money that you will need over the next few years.”
Ms Smith also emphasised that maintaining consistency can support the development of a savings habit.
She said: “One of the simplest ‘set and forget’ behaviours is using your ISA allowance regularly.”
Some savers may feel at ease progressively transitioning from a cash ISA towards a stocks and shares ISA as time passes, she added. Investments have the potential to deliver stronger growth than cash savings over the long term.
However, the value of stocks and shares can fall as well as rise, so individuals may wish to assess the level of risk they’re prepared to accept.
Ms Smith said of the potential for funds to fall in value: “It’s worth considering whether this is something that would keep you up at night or if you would see it as a buying opportunity – and what you’d do if markets fell further.”
Maintaining diversification when investing and steering clear of “putting all your eggs in one basket”, may prove a sensible objective, she suggested. Ms Smith added that some individuals may wish to seek financial advice.
The Government-backed MoneyHelper website also offers guidance and resources to help people accumulate savings.
Ms Smith said: “The type of investment habit you build can also be adapted by life stages, such as buying a home, starting a family or approaching retirement.”
She said of building wealth: “It’s about developing good habits over time.”
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