Managing your money is a juggling act between meeting your regular needs, saving for a rainy day and thinking about the future. Quick access to cash should you suddenly need it usually involves low interest, whereas growing it for the future often means you can’t get to it for a while.

So how should you divide it up? And should you just use savings accounts to put your money to work or consider investing if you haven’t already?

We spoke to one of our wealth managers about using current accounts, savings and investing to make the most of your hard-earned cash throughout your life.

Royal Bank Premier Wealth Manager David Watkins says it’s all about putting your money into three pots – the here and now (day-to-day), the more immediate future (up to the next five years) and the many years ahead (five years and more).

“Obviously your day-to-day current account is there to meet your basic needs – food, bills, mortgage, but also the more fun stuff like nights out and hobbies,” he says. “These things should ideally be paid for out of your income, rather than any extra capital you may have, and your current account is there to receive that income so you can use it accordingly.”

He adds, “Then it’s always good to have an emergency fund for anything unexpected – cash set aside you can get to quickly should you suddenly need it. Having such an emergency fund in place – an instant access deposit account – reduces any reliance on your longer-term savings.”

Keeping your money ‘as cash’ – or within a deposit account – does of course still see it earn some money. The UK three-month average deposit rate, according to data provider Refinitiv, shows that, in the five years up to 28 February 2023, cash returned 1.4%, and 4.0% over 10 years*. 

Google it, and you’ll see suggestions around how many months’ worth of your salary you should have in easy-access savings.

But our wealth managers work it out differently.

David says, “When we go through this with customers, we try to work out their average monthly spending on what they need and what’s important to them – all their bills, other regular payments, and how much they feel they need to enjoy life.

“The amount varies from person to person, it’s not an exact science, but we recommend having at least six months’ worth of that expenditure in a rainy day savings account. Sometimes it’s less, but sometimes we even recommend a years’ worth. The minimum? It should never be less than four months of your essential expenditure, plus extra for any known costs you’ve got coming up.”

Emergency fund sorted, a fixed term savings account – something that’s hard to reach for a year or two but could help your cash grow – may be good for the things you know you’ll need money for over the next few years.

It may be an upcoming tax bill, home improvements or an expensive holiday. It can make sense to save this money somewhere that pays higher interest than your current account. It builds up nicely so that, when the time comes to pay up, you can do so and find yourself with a little extra – or a lot extra depending on how much you saved. 

Now, investing can be daunting when doing it for the first time. Stocks, bonds, market moves, the value of your investment sometimes going down as well as up. Unless you’re an enthusiast, you might think it’s just not for you.

But it could be effective in growing your money for the more distant future.

The focus should be on that last word though – future. David stresses investing should only ever be for the long term – five years or ideally longer, like a decade. And you should only consider investing any surplus money you have over and above your other needs.

David adds, “If you’re in it for the long haul, investing could grow your money more than if you kept it as cash. There can be bumps in the road along the way, but the MSCI All Countries World stock index, for example, has risen significantly over the last five and 10 years. So investing could increase the value of the money you put aside for the future.”

Some stats to support David’s point. The MSCI All Countries World stock index has returned 51% over the last five years – as at 28 February 2023 – and 169% over 10 years (in sterling, with income reinvested)*.

It’s always worth remembering, though, that past performance should not be taken as an indication of future performance. The value of investments can fall as well as rise, and you may not get back what you put in. You should continue to hold cash for your short-term needs.

One thing that could help manage the potential risks involved is diversification – a mix of stocks, bonds and other assets. For example, when stocks fall, bonds tend to rise as investors move to the relative security they can provide.

Take a look at investing online with Royal Bank

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