How to use the three pot rule to reach your goals

As Independent Financial Advisers, it’s our job to make you feel comfortable when sharing your unique hopes and dreams for the future so in this post we talk about how to use the three pot rule to reach your goals.

Clients often tell us they want to save for a comfortable retirement, but they also want to travel now or upgrade their home. While some people may have clear and obvious goals, for others they can find prioritising their goals and saving strategically can be tricky.

When it comes to financial planning, it’s important to have a clear idea of your goals, both short-term, medium-term and long-term.

Maybe you want to go on a big holiday next year? But you also want to purchase a home in 5 years and live comfortably in retirement. This means you’ve got short, medium and long-term goals.

Once you know what these goals are, you can use the three pots to make a plan.

Pot 1: short-term goals – less than 5 years

Short-term financial goals are those that you want to achieve in the near future, typically within the next 0-5 years. Here are some tips for setting and achieving short-term financial goals.

For any short-term goals such as holidays, home improvements or a new car like these (less than five years), it’s normally a good idea to stick to cash products – these tend to be lower risk. This also means your short-term plans shouldn’t be impacted by any stock market ups and downs.

It’s also a good idea to have an emergency fund. An emergency fund will cover unexpected costs like a broken boiler or car repairs. Three to six months’ worth of expenses is usually a good place to start, but you might want more depending on your circumstances. If nearing or in retirement it’s usually best to have closer to 1-3 years’ worth of expenses.

For any cash that you won’t need for your emergency fund, it could be worth locking it away in a fixed rate cash product. You’ll usually be able to get a better rate. But the trade-off is that you can’t usually access your money until they end.

Pot 2: Medium-term goals 5 -15 years

Medium-term financial goals are those that you want to achieve within the next 5-15 years.

Here are some tips for setting and achieving medium-term financial goals:
For any medium-term goals you could think about using a Stocks and Shares ISA. Using your ISA allowance you’ll be able to choose from a wide range of investments, including shares, investment trusts and funds. Plus, you won’t have to pay income or capital gains tax on any profits you make.

Tax rules can change and their benefits depend on your personal circumstances. Unlike cash, investments fall and rise in value, so you could get back less than you invest.
Remember It’s important to choose investments that match how much risk you feel comfortable in taking.

Having a mix of different investments in a well-diversified portfolio is normally the best approach to investing. Investments like shares, bonds and property perform differently in different market conditions. As do different regions and sectors. So having a mix could mean you always have something working well.

Pot 3: long-term goals

Retirement may feel a long while away but the earlier you start to think about your pension savings the better.

Starting early means you’ll be able to make the most of compounding – this involves putting small amounts away regularly over a long period of time. These small savings could grow into impressive results.

For your longer-term goals, you could think about using a pension to boost the amount you’re saving through tax relief. No matter how much tax you pay, the government will add 20% in tax relief to your pension. So if you put £8,000 in your pension, the government will add an extra £2,000, bringing the total amount to £10,000.

The amount you get in tax relief could be even higher if you’re a higher or additional rate tax payer.

If you’re a UK resident under the age of 75, you can get tax relief. To get tax relief on your personal contributions, you can only top up as much as you earn each tax year, or £3,600, whichever is greater. Remember, money can’t usually be taken out of a pension until at least age 55 (57 from 2028). Pension and tax rules can always change.
Remember, other limits can also apply, like on how much you can put into your pension or if the total value of it exceeds a certain amount.

How to use the three pot rule to reach your goals – Keep up to date on your pots

The three pots rule is a good guideline, but everyone’s circumstances and goals will be different.
Life isn’t always plain and simple, if your goals change remember to review your pots to make sure you are still on track.

If you need help establishing your goals or need to discuss the most effective plan for your financial future get in touch. We offer a free, no obligation initial meeting.
Call 01244 347583 to speak to our team, or ask us a question using the Contact Us form.


This blog is for general information only and does not constitute personal advice. The information is aimed at retail clients only.

The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Source: HL

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