The three buckets

I was reading a thread on askaboutmoney where the poster had set up a myriad of investment strategies and accounts based on when they will need the money. Within each of the strategies, they had micromanaged the asset allocation, some having just 2% in one fund. In all honesty, what impact is a 2% allocation going to have on anything?!!

Things really don’t need to be complicated. You just need three buckets.

Cash Account

This is for your short term needs. It will have your 3 – 6 months living expenses in it as well as savings you may have for larger annual expenditure such as holidays, school fees etc. If you are planning on changing your car in a few years, funds for a new car can go in here (people who change their car regularly tend to do so on finance plans and don’t pay cash every 3 – 5 years).

You change shop around for the best interest rate available but the main purpose of this account is accessible money, not returns. So locking it away in a 24 month fixed term account is no good to you for this.

Investment Account

This is your medium to long term needs. This is for money that you are willing to put away for at least five years. It doesn’t need to be inaccessible for that long, you just won’t need to draw down the money in that period of time. This is money that you want to grow to increase your overall wealth. The main asset class for this money will be equities, investments that will grow over the long term without taking unnecessary risk.

Planning for future education costs is a prime example of the use of this money. Whether your children go to private secondary school or you have to pay for accommodation as well as university fees, you will need access to this money at some stage. It can also be used for those unexpected expenses that come up from time to time or even take some profit and pay down your mortgage.

Pension Account

This is your long term growth account. Depending on your age, this money can be invested for many decades and for most, you will be in your 60s before you can access it. If you can afford it, maximise the pension tax relief available to you based on your age. Pensions are an extremely tax efficient way of building your wealth. You get tax relief on the way in, your employer can contribute to it without you paying any tax and the fund accumulates tax free until you start taking the money out.

Any excess cash that you have after maximising your pension account should go into the investment account to grow your wealth.

There will of course be additional accounts such as different pension accounts from different employers. Or you may have a State Savings investment as well as an equity investment account. People like to segment money for different purposes, like an education account and a separate new car account. There is no need for this but if it make you feel comfortable, then go for it, it’s no big deal. What is important is that you have the three buckets and you know what they are for.


Steven Barrett

01 July 2024