Investments expert explains ‘three pot’ method for building savings

As the new tax year approaches in April, some people may be considering starting a new habit to build a pot of cash.

Investment habits can be adapted according to life stages, Lucy Smith, an investment manger at Killik & Co, said (Dominic Lipinski/PA) (PA Archive)

Some people who are considering starting a new savings habit or building on an existing one as the new tax year approaches in April may be able to get a clearer idea of their savings goals by grouping them into separate “pots”, according to an investments expert.

Lucy Smith, an investment manger at Killik & Co, said that a “helpful” way to consider structuring savings can be to consider building an emergency pot of cash that can be accessed easily if needed.

Some people may want to aim to build up at least three months’ worth of spending in it, depending on their own circumstances and what they feel comfortable with, she said.

A “planned spend” fund could be a second pot, with money put by for foreseeable goals in the next few years, such as a home purchase, a big holiday or any other life expense.

Longer-term “lifetime” savings that will not be needed for around five years or more could be put into a third pot, Ms Smith suggested.

She said: “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 said a consistent approach can help with building a savings habit.

She said: “One of the simplest ‘set and forget’ behaviours is using your Isa allowance regularly.”

Some savers might feel comfortable gradually moving from a cash Isa towards a stocks and shares Isa over time, she said.

Investments may potentially grow more strongly than savings held in cash over time. But the value of stocks and shares can go down as well as up, so people may want to consider the risk level they feel comfortable with.

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.”

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Staying diversified when investing and avoiding “putting all your eggs in one basket”, may be a useful goal, she said.

Ms Smith added that some people may want to get financial advice.

The Government-backed MoneyHelper website also has tips and tools to help people build 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.”