This post is all about the different pots I have, why I have chosen them and how much goes in.
So far we have gone through why me, a complete financial amateur, has decided to start a blog on financial independence, and also went through how I was introduced to the world of F.I.R.E. We briefly spoke about the steps I took and where my money goes, but todays blog is going into more details on my different pots and why I have them in these specific areas.
So as a reminder I started this journey in May 2021 with no bad debt, no car repayments and “just” my mortgage. All credit card payments were made in full each month. I had zero savings anywhere and would dance on the edge of my overdraft at the end of some months incurring a few quid interest payments. There was a pension but with less than 18 months contribution I was ultimately starting at a pretty tide zero in the net worth column!
Pot 1:
So following a great F.I.R.E. flowchart from a Facebook group I joined, along with all the advice in the books I read, step 1 was to get myself an emergency fund sorted.
This fund as the name suggests is for any emergency that comes along. This pot is the one to be used if you lost your job tomorrow and needed to survive on it’s savings for all daily expenses such as bills, mortgage food and other contracted commitments such as mobile phones, TV etc. It is not to be used for known large expenses such as car repairs or desirable house maintenance. For this you used your sink fund or budget – more on that later.
It is generally agreed to have between 3-6 months’ worth of cash in here. I chose to go on the lower end of this scale for a few reasons.
1/ I have average sick pay cover and my wife has excellent sick pay cover. I also have income protection to cover in the scenario of something serious such as a leg break or cancer, where my sick pay would run out.
2/ We are both in secure industries and jobs that we are always sought after. It doesn’t mean we get paid well, but there is always work. Since graduating 13 years ago, my wife and I have never been unemployed searching for work. In some circumstances I secured a job in as little as 12 hours, but more often than not it was a week or two. Further onto this security we both work in companies where people generally don’t get fired unless they are horrendously useless, and even then it takes a long time for it to happen. So if we were all of a sudden rubbish at what we did, or abusive to other staff, we would have a good 3 months to prepare for the contract termination!
3/ As we both have good sick pay, both have secure jobs, and our bare minimum expenses can be covered by one of salaries, I didn’t see the need to have a particularly large emergency fund. **Spoiler alert – 11 months on this call appears to be holding true!**
The 3 months living expenses tipped over at a little over £6k, so I had that in mind as my target.
After some reading around the options of where to put, I decided on NS&I Premium Bonds after watching this video from Damien. It’s well worth a watch if you have time and want to know a good summary of what NS&I bonds are and how they work. If not I will try in a couple of sentences.
They are bonds (Government loans) with the British Government. Any interest on them is paid back in the opportunity to win monetary prizes in it’s monthly draw. The more bonds you hold, the greater chance you have of winning – much like the lottery. The prizes range from £25 all the way to £1million. As interest rates are so low right now I was ultimately playing the lottery every month for a total of £30 for the year. This is the equivalent of how much interest would have been paid out to me.
I’d much prefer the day dreaming what-if thinking of winning £5000, £10,000 or even £100,000 in the draws, over the guaranteed £30 interest I would have got with the savings accounts I was looking at.
I started off with a £100 going in here a month, increased it to £150 after a few months and whenever I have money left over at the end of the month I throw it into here. At the time of writing it currently sits at £2000. So I am 1/3 of the way to my target.
In terms of the prizes won from all the month draws over the past 11 months, tallied together I have won in total £0……….
Even though I am still day dreaming what I would do if I won, I have no regrets on going on this path and will continue to do so even when I hit my £6k I reckon.
I am able to withdraw the money nice and easy should I ever need it and who knows, perhaps one day I’ll get an email notification saying I have won something back!
Pot 2
This is my investment pot where I intend to have this money growing. This is my stocks and shares (S+S) ISA. I had heard about an ISA before, and my new research led me to the S+S version. The benefits of an ISA is that whenever I take money out of my ISA I don’t pay tax on it as the money contributed has already been taxed. This is really important when considering your whole portfolio and how much you need – that’s a whole other blog post!
Traditional advice dictates that you should have your emergency fund full and ready before investing into anything else. I decided to ignore this for a few reasons.
1/ All of the reading I had been doing had an element of specific strategies to employ on investing. All the books talk about index investing in some capacity, and the podcasts I have been listening to pretty much had all done this to some extent. From my research I knew I wanted to invest in index fund, and even specifically which index fund I wanted to invest in. I also knew from my reading and podcasts that you needed to ‘set and forget’ this type of investment. Not swap and change, avoiding the distractions of the media and other peoples advice. So my initial plan of contributing to my NS&I solely for the next few months until it had a decent buffer, at least £1k, soon proved impossible. Even when I had decided which fund type and platform I would go with I was constantly looking at others. Going down rabbit holes of fund prices, distributions of assets, past performances (pointless!) etc on such minor details it made no difference and offered no benefit other than had me overthinking the whole thing. It was proving to be a huge distraction and waste of my time, as I was re-researching and going over the same points again and again.
This was the emotion and impatience of wanting to get stuck in. To start investing so I could then ‘set and forget’ it and focus on reducing spending within monthly budget. The advice of ‘time in the market, not timing the market’ also swayed here. There was probably an element of not building it up to a time 6+ months down the line when all I wanted to do was do it now and avoid any potential anticlimax. So couple this emotion with point 2 below, and I had my answer.
2/ All the same reasons I was only putting 3 months of expenses into my emergency fund allowed me to rationalise I could start investing alongside, presuming/hoping/calculating I wouldn’t need my emergency fund so I could build them at the same time. You could say this almost doubles down the stupidity. Investing before having an emergency fund and having an emergency fund that’s only 3 months, but I was happy with the trend my wife and I had with work to take that ‘risk’.
My research had led me to invest on the Vanguard platform in their FTSE Global All Cap Index Fund.
I came to chose Vanguard for a couple of reasons. Firstly on the highly unlikely outcome that the provider I was using went bust, I wanted them to be under the UK Financial Services Compensation Scheme (FSCS). This scheme pays out up to £85k to anyone who has funds in these companies should they go bust. I was entering in the world of investing so I wanted to take opportunities of security where I could.
Secondly I picked Vanguard as it had been recommended from the very beginning from those in USA and here in UK. I do feel you are splitting hairs trying to decide between the big providers of Vanguard, AJ Bell and Hargreaves Lansdown. I am confident they all have similar products, support, fees and outcome.
The final ridiculous reason was I had never heard of Vanguard until May 2021, and only when listening to podcasts or specific YouTube videos did I hear it’s name. I said to my wife one night when we were watching telly “I think I am going to start looking at investing” – 30 seconds later a Vanguard advert came on! This was enough on the mathematical data spectrum that is fate that I had my platform choice!
I chose the FTSE Global All Cap Index Fund with a little more rational and rigour you’ll be glad to know. A lot of the advice I had ready from the States recommended a 4000 stock tracker specific to the states. We had very similar products here in the UK, and the rationale of having such diversification with so many stocks is that it all averages out. Ultimately you are betting on the USA being in a better position in 10-30 years time than it is now. A pretty safe beat really. With the FTSE Global All Cap Index Fund you are making yourself even more diverse and instead of just betting on America, you are betting on the World. It was an even safer bet in my eyes. Similar to reducing that risk that I went with a recognised platform with FSCS protection, I was going for a fairly conservative 100% equity fund. My thinking was I could always change it further down the line if I wished.
I have stayed pretty steady with the investments here and kept the standing order at £100 per month since the start. I did change the amount recently to £200 but had to drop it again as I miscalculated my expenses going forward.
I have also just changed onto the US Equity Index Fund in the last month as well and will continue this for the rest of the year. I ultimately wanted a big more weighting onto the States and this was the type of fund JL Collins spoke about in his Simple Path to Wealth, and a similar fund that Warren Buffet recommended to his wife.
Prior to the Ukraine-Russian conflict my fund had a steady return of just over 5%, which I was happy with. Like most since March things have gone downhill. My contributions haven’t changed and I will keep plugging away.
Pot 3
The final pot is my sink fund. Intended for those known big expenses that come about throughout the year. Car servicing, house repairs and holiday.
I have it in a separate bank completely to my current account so I can’t access it. I have put it in a Nationwide current account for two reasons.
1/ it was initially in a Virgin Money account which I signed up for just to get the 15,000 point bonus. I needed to fulfil the criteria of 2 direct debits, have £1k savings and not close it within 60 days of opening to be eligble. I then followed the advice from Martin Lewis at Money Saving Expert and checked the bank switch deals once my Virgin points were gained. Nationwide had a £120 switch offer, which although was £10 less than Santander had a little cheeky offer running.
2/ The cheeky offer was that each Nationwide member would be entered into a monthly draw to win monetary prizes. Similar to the NS&I set up. Similar that I haven’t won anything here either!
This pot has mostly worked in that I used it to pay for our holiday recently. This meant my other pots 1 and 2 continued to have steady investments without being disrupted. Which for me is really important from an emotional stand point for me. I know while I am away I am still doing the good stuff in getting closer to F.I.
This is set at £100 also but will increase shortly to £210 as we have a large known expense coming out next year. This was where the change in the amount contributed to my S+S ISA had to change.
So there we have it. My current set up of automation and where each pot lives. Still got some way to go until I have my full emergency fund set. I reckon at that stage I will reduce these contributions to £25-50 per month and put the rest into my S+S ISA. We shall see – future me problem.
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