We’ve got savings all wrong.
To have pots of money, you need to think more carefully about your pots.
So says Charlotte Ransom, chief executive of Netwealth, an online wealth manager.
Netwealth’s USP is bringing money together from family members to reduce the investment management fees for a network of investors. The bigger the pot of funds, the lower the fees. They go down from 0.65 per cent on a £50,000 collective pot, to 0.35 per cent for a network of up to 8 people who bring together a minimum of £500,000. It’s a way of making use of your connections to make more money, essentially. But your money is still managed according to your individual risk profile and priorities.
Anyway, Charlotte reckons she has cracked the best way to divide your money, and she calls it the three-pot theory.
Most of us have a pot one. That’s your “Liquid Pot”, says Charlotte, “day-to-day cash in and cash out. Everyone needs this just to live. It is made up of salary, rental income and dividends, if you earn them”. Liquid just means the one you use a lot, daily in fact, and to which you need constant access. If it was real liquid, it would be water.
Then some of us also have a pot two, too. Pot two, what Charlotte calls “sleep well money” is medium to long-term money that you invest somewhere trustworthy, like Netwealth, for the things that really matter in the medium to long term, such as school fees for children, care home fees for parents, retirement money (pensions and very long term savings like ISAs and general investment accounts). These you want to set up and forget, relying on wealth managers like Netwealth to ensure that the money is there when you need it. “Most people are bored rigid of pot two”, she says. If it were a drink, it would be Horlicks.
Many of us also have a pot three. That’s the “Passion Pot”, says Charlotte, which is for higher risk illiquid investments like hedge funds, private equity, houses, wine, a boat, or some other expensive hobby. These investments are for wealthier people who may be hoping for a higher return over the long term, or just some fun. These investments are likely to preoccupy their owners, and are definitely not the kind of sleep-well money that Netwealth manages. Let’s call it the champagne pot.
So, to recap:
- Current account: day-in, day-out cash.
2. Medium to long term savings and regular ISAs for things like school fees for children, care home fees for parents, retirement money (pensions and very long term savings like ISAs and general investment accounts). It’s what a wealth manager would look after for you if you had one.
3. Long-term investments: property, art, wine, a boat, or some other expensive hobby.
This seems like quite a useful way to organise your cash. The pots could just be called short, medium to long-term and forever. Or they could be called whatever you want them to be called according to their purpose or function in your life, rather than the term or type of vehicle you are using: “Daily grind”, “Stuff that makes me anxious” and “Future fun”, for example.
The point is really that different types of assets perform different functions in our overall portfolio (even if that portfolio is as basic as a current account and an ISA), because how they derive and deliver returns is different.
Put another way, you don’t want to mix up your starter, main course and dessert all on one plate, so you don’t want to do that with your investments either. Really, this theory applies to life in general – the way you organise time in your day (I have a work time “pot”, a kids pot, a fiance pot and a me pot) the way you organise your worries – family, work, future, etc.
Breaking things up to make them more manageable and ultimately more successful is hardly a ground-breaking concept, and yet still with money, we tend to operate with just two quite crude categories: spending and saving.
As a result of not categorising properly, Charlotte says a common mistake for some individuals and fund managers is to mix up their main course and desserts – or rather pots two and three, and the result is that pot two becomes less liquid and less transparent.
So the moral of the story is, keep your pots separate and properly labelled and you should note a corresponding reduction in your money worries and hopefully, an increase in your overall wealth. So you may actually, genuinely end up with pots of money.