Why finding balance in your finances is the secret to a successful plan

“Should I invest all my money?”

On the face of it, this recent request from a new client isn’t unreasonable.

After all, as financial planners, we spend a lot of our time emphasising the importance of investing when you’re aiming to grow your wealth over the long term.

But all of it? That’s actually not such a good idea.

Why? Well tying up 100% of your capital in long-term investments could prove costly when you need access to short-term funds.

Take the beginning of this month: Japan’s Nikkei index saw its biggest daily percentage fall since 1987, losing 12% in one trading session. US, Asian and European stocks also went into a tailspin.

Yes, these dips were temporary, and markets recouped much of their losses. But imagine if that was the moment you’d needed to access funds? You’d have essentially locked in those losses. Much better if you can have part of your wealth in a short-term contingency fund.

That’s why the key to any financial strategy is striking a balance. Long-term growth on the one hand, with investments that can help deliver above-inflation returns. And on the other, something that covers your short-term needs. This means always retaining some of your wealth in cash.

Why you need an emergency fund

Let’s look at a real-world example. Cash reserves can come in handy if you find you’re made redundant.

For anyone who’s been through this, it can be a stressful and emotional time – but it can often have a silver lining, because what comes next might be a dream job opportunity. However, having enough money in reserve can be the difference between making a move you have to take, rather than one you want to take.

Having something in reserve to support you during this period is especially important if it happens later in your career. It gives you the time and breathing space to contemplate other options – you might not want to back to full-time employment at all for example; perhaps you’d like to take the opportunity to wind down towards early retirement by taking on a part-time role. If all your money was tied up in investments, you wouldn’t have the same flexibility.

How much to put aside – and where

We advise our clients to keep around six month’s savings in reserve.

Having at least £20,000–£25,000 in cash means you’ve got funds readily available that you can draw on if needed. Depending on your salary and outgoings, the level you keep in reserve might even be more.

But when talking about cash, it’s not a case of one size fits all. There are several ways to look after your reserve fund.

You could choose easy-access savings with a building society or bank account. While interest rates are not as high on cash as they had been 12 months ago, it’s still possible to find interest rates of 5% or more. Many banks also offer notice accounts, offering higher rates, but with penalties for early withdrawal.

Cash ISAs are also a popular option if you’ve already used up your personal savings allowance. And, as we discussed here, premium bonds are another option for cash. These are particularly worth considering if you are a higher-rate or additional-rate taxpayers and have already gone used up both your personal savings and ISA allowances. This is because premium bond prizes (which range from £25 to £1 million) are tax free.

Going for gold

After more than two weeks of scintillating competition, the sun has now set on the Paris Olympics. Athletes from across the world have pushed themselves to their absolute limits to win gold – or just achieve a personal best.

Among the many Team GB medal hopes and winners, we watched Katarina Johnson-Thompson leading the charge in the heptathlon. It’s surely one of the hardest events that takes place in the athletics stadium, encapsulating the Olympic motto of “faster, higher, stronger”.

The seven events require strength, speed, and stamina. The best competitors aren’t those that excel in just one event, they have to balance all the individual elements.

Financial planning for your future is also about balance. It’s making sure that you’re invested in a diverse range of assets so that you’re not putting all your eggs in one basket. But it’s also making sure that you don’t neglect your short-term cash reserves. With all the elements of your strategy working together, you’ve got a better chance of being successful.