It has become tradition that each year Abundance commissions an independent survey on the way Brits use and think about their money. One of the big things that came out of the survey this year was the disconnect between what people say they worry about when it comes to money, and where they subsequently keep their rainy day funds.
First the good news: 76% of people are saving for a rainy day. While more than half of those who are saving wish they could save more, something is always going to be better than nothing.
So just how much are people saving? Almost one third of us have £500 or less saved for a rainy day but an even higher proportion – 35% – have £5,000 or more. That is a decent amount by anybody’s standards. It is a lot to keep in cash, though. Of the 7 options we gave for where people keep their rainy day money, the runaway winners were cash products; see the chart below for the answers people gave.
While it does not seem unreasonable for people to keep their rainy day money in cash at first glance, on closer inspection of the things we worry about when it comes to money it begins to make less sense.
Just what do people worry about? As it turns out, our money worries are overwhelmingly long term; things like retirement, your family’s future, even old age care costs. The chart below highlights the long-termism in our financial worries.
Retirement comes before covering unexpected short term expenses. Of the most common choices – i.e. those that more than 50% of people said was a worry – two thirds are long term. This raises the question: what is your rainy day money for and just how much is it truly appropriate to keep as cash?
Take retirement, or creating a long term income, or saving for old age care costs for family members. These are not things that cash can help with. They are all ongoing events that demand an income that does not necessarily have a fixed end. Cash cannot provide this.
All of which is not to say that cash is useless. Far from it. If something unexpected does crop up, or you are thinking of remodelling your kitchen, cash remains king. As such, the cash rainy day pot is not and never will be redundant.
The question is how can our money alleviate some of the above worries? A big pile of cash is not necessarily the answer. It is here that identifying those worries and whether they are income or growth concerns can help to guide our choices.
The Abundance ISA is one option that can be useful if our primary concerns are identified as income problems. Most of the investments on Abundance are long term and pay out regular tax free returns of capital and interest. These returns can be partially or fully reinvested, also tax free.
The real benefit of the Abundance ISA is the return of capital as you go along rather than in one lump sum at the end. This means that starting small is not a disadvantage. Say you invest £1,000 in one investment offer. As time goes on and you get some of that £1,000 back twice per year, you put the money into new investment offers. All the while, the returns you receive from investment offer one are still calculated based on the full £1,000 you invested. The result is that initial £1,000 is spread across several projects, along with the returns, and generating more and more returns. So, when you come to draw an income it’s going to be that bit better.
Rainy day money is important. This ISA season, why not think about what your rainy day money can do to give you one less thing to worry about?
Part or all of your original capital may be at risk and any return on your loan or investment depends on the success of the project. Investments tend to be long term and may not be readily realisable. Estimated rates of return are variable and estimates are no guarantee of actual return. Consider all risks before investing.