Until credit cards and ATM machines existed, both handy things admittedly, banking used to consist of a basic set of different accounts.
Until credit cards and ATM machines existed, both handy things admittedly, banking used to consist of a basic set of different accounts. Everyone had a savings account, which was for savings, and a separate cheque account for major expenses. Often, households would withdraw a week’s worth of cash and allocate it into different jars. This jar for the groceries, that jar for the power bill. Banks even offered separate bank accounts for different purposes. Christmas Club accounts took regular deposits and were untouchable until December. In exchange for that lock-in, the banks offered greater interest than they offered savings accounts. That was Christmas sorted. Different accounts had different operating rules. The upshot was that households could have a keener, more visible, sense of purpose with their spending. Goals were adhered to.
But with plastic cards came the bundling of all kinds of purposes onto one. Plastic could be used in ATMs, or as credit cards or – more recently as swipe-and-pay cards too. Of course, you can now use your phone to do the same thing. No wonder so many people don’t use cash any more.
But at the same time, they have no tangible idea whether they are in debt or in credit. Many people have no idea of their net financial position on any given day. Some banks to their credit have implemented on-line tools to help you keep track of your money. Rather than using jars, we suggest apportioning your money into “boxes” for their specific purposes. The boxes you choose to park your money will vary according to how readily accessible your money needs to be, the timeframe and the amount you have on hand.
- When a client has money to invest, we first make sure that they set aside funds for their emergency fund, and their goals (e.g. travel). These should be parked in an accessible savings account.
- We then create an investment portfolio for the balance of the money.
- For retired clients, the simplest arrangement is to have an account for living expenses, which are funded by the drawings from the portfolio and any other income streams e.g. NZ Super or rental income.
- Savers can invest surplus savings over and above Kiwisaver into their portfolio.
- Within the portfolio, discrete portions of the portfolio have their purpose.
The table below gives a general picture of how we might ‘box up’ a simple financial arrangement:
No two savings and investment portfolios will be identical, but the table above demonstrates the roles that different silos play. For the long term, it is far easier to keep different facets of your money Separated. They have different purposes and different operating rules.