Should I ... Invest some of my cash savings?

This is the first in a mini-series of "Should I ...?" blogs - hopefully addressing some of the common questions which we have about our money.

 

I'm often asked how much you should keep in savings and how much to invest. Well, you should never leave yourself without some easy-access cash, but on the other hand you can have too much of a good thing! For many people, having something like a quarter to a third of their annual expenditure held in cash is about the right level. More if your income is uncertain, less if your circumstances are stable.

 

So if you have more cash than you need, should you be investing it? In most cases I would have to say "yes". There are caveats, of course, like being able to leave it alone for several years, and being willing to see ups and downs in value. But on balance, and over the longer term, history tells us it is better to be invested than to hold cash.

 

Where you should put it is a whole different question, of course. That depends on your attitude to investment risk, whether you are looking to take an income from it, and various other things. But a starting point for most people will be to use their stocks and shares ISA allowance to invest in funds. That will give you access not only to shares but also to other "asset classes" like property funds and fixed interest funds which will be less volatile than shares.

The most important personal finance tip...

There's one bit of advice I would give to anyone and everyone. It's a simple thing to do but will potentially avoid all sorts of problems later in life.

 

Again and again I see people suffering financially because they haven't followed this simple advice. That could be anything from having to work when they would prefer to retire, up to landing in serious debt when it was avoidable.

 

It really is simple but I'm going to say it in several different ways:

• Give yourself a financial buffer
• Set up an emergency fund or rainy day fund
• Save!

This tip applies equally to high income and low income situations. Although perhaps it's more significant for high earners, because they are used to spending a lot, and if they lose a job it's a big impact.

 

I know I have covered this topic before - http://moneyatthespeedoflife.blogspot.co.uk/2012/01/plan-for-more-income.html - but it's amazing how much a cushion of savings can help when something changes in life, or something goes wrong. Give yourself a break.

Are bonds and gilts too risky?

If you talk about investing to someone, they generally assume shares - otherwise known as equities. That's when you buy the shares of commercial companies and become a part owner of the business, entitled (usually) to any dividends the company pays out, as well as to the change in the share price - hopefully an increase not a decrease!).

But in terms of the sums involved, the other main area of investment is much much larger: Bonds. Those are "fixed interest" investments where the issuer - either a company or a government - promises to make regular fixed interest payments for the life of the bond, and then to give you your original money back at the end of the term. You can also buy and sell at market rates during the life of the bond.

Bond investing used to be the norm, with equity investing seen as too risky. But the big enemy of successful bond investing came along: inflation... the value of the fixed interest payments you receive reduces if inflation increases. Hence the rise in popularity of equities.

But even ignoring the inevitable return of inflation at some point, bond investing is no longer the "invest and forget" option is used to be. The economic situation is causing anomalies such as the "flight to quality" which means that Government gilts have been in demand, increasing their price. So moving your pension plan into gilts a few years before retirement to give you some stability is not necessarily the right move, since they could head downwards again without much notice.

The bottom line is that a diversified approach is really the only way. Along with regular reviews of what your investment portfolio includes you should have some hope - but no guarantees - of staying ahead.