What to do with your savings: the order that works
Before you ask which product to choose, ask what the money is for. What you do with your savings depends on when you will need them. The most sensible order has four steps: cover emergencies, clear expensive debt, set aside what you need for dated goals and, only then, think about growing the rest.
This guide is general information, not financial advice. It doesn't know your situation and doesn't recommend any product.
Step 1: have a cushion for emergencies
First comes an emergency fund. A common guideline is three to six months of essential expenses, kept somewhere safe and accessible, separate from your everyday money.
It comes first because it protects everything else. Without it, a breakdown forces you onto a credit card or into selling an investment at a bad moment. If your savings don't reach that figure yet, you already know what to do with them.
Step 2: clear expensive debt
A credit card balance or a high-interest personal loan costs you money every month. Paying it off has a certain result: you stop paying that interest. Few things can promise the same with no risk.
Not all debts are equal. A low-interest mortgage isn't usually as urgent. Look at the interest rate on each debt, start with the most expensive and check whether paying early carries a fee.
Step 3: set aside what has a date
If you will need the money in the next few years, for a deposit on a home, a car or a renovation, what matters is that it's there when the time comes. A market fall just before that date would leave you no room to recover.
For this money, look for safety before return. A savings account that pays interest or a fixed-term deposit usually suits it better than the stock market. Before you lock money away, check when you can take it out and what it would cost to do so early.
If you're not sure how much to set aside for each goal, start with how much to save each month.
Step 4: grow what you won't touch
With those three steps covered, what's left is money you won't need for many years. Leaving it idle has a hidden cost: when there's inflation, it buys less each year. This is where it makes sense to think about growing your savings, and three ideas matter more than picking a particular product:
- Time. The longer you can leave the money, the more falls you can sit through without selling.
- Risk. Higher expected returns mean a higher risk of losing money. Ask yourself what you would do if your investment fell sharply for a whole year.
- Costs. Fees come out every year, whatever happens, and over time they add up. Always compare them before you decide.
If you don't understand a product, don't buy it. Your national financial regulator is a good place to learn the basics and to check that a firm is authorised. For big decisions, a licensed financial adviser can look at your case.
Summary by time frame
| When you need it | What it's for | What matters most |
|---|---|---|
| At any moment | Emergencies | Access |
| In a few years | Dated goals | Safety |
| Many years from now | The long term | Return, accepting risk |
Common mistakes
- Investing with no cushion. The first emergency forces you to sell.
- Leaving it all in your everyday account. Money that isn't separated gets spent.
- Mixing goals. If it's all together, you don't know how much you have for each thing.
- Believing in high guaranteed returns. If someone promises a lot with no risk, be suspicious.
- Copying someone else. Their time frame and expenses aren't yours.
An example
With invented figures: Sam has 10,000 saved, spends 1,200 a month on essentials and owes 1,500 on a credit card. Sam wants a deposit for a car in two years.
- Keep 3,600 for three months of essential expenses.
- Pay off the 1,500 on the card.
- Put 3,000 for the car in a savings account.
- That leaves 1,900, which can take the fund towards six months or go to the long term.
Sam's split won't suit everyone, but the order helps anyone decide.
How to keep it in view
Your money is easier to understand when each purpose has its own place. One account per goal is enough, or a spreadsheet with a row for each. Add it all up, take off what you owe, and you have your net worth, the best measure of whether you are moving forward.
In abacova you can create an account for each goal and move money between them without it counting as spending. The dashboard shows your net worth and how many months your money would cover. abacova doesn't invest or move your money: it records what you have and what you do with it. The free plan allows two accounts, and the pricing page shows what each plan includes.
Where to start
Write down how much you have saved, how much you owe and what you will need in the next few years. Those three figures will tell you which step you're on.