Throughout my career as an adviser, I have been approached on numerous occasions by teachers who have some cash and disposable income and would like to use this money in a structured way but are unsure of the best approach. I would always recommend that the most straight forward method is to essentially break this down and think about it as having three separate pots.
The first pot would your emergency fund. This means putting aside an amount that is approximately three times your monthly net income as your base level, in a place where it can be easily accessed such as in a bank account. This pot is to cover any unexpected contingencies. Before we consider pursuing any type of longer-term investment, we always ensure that this in place.
The second pot is for your medium-term goals – this would typically include things that you may or may not have planned for, such as home refurbishments, or a special holiday. This might be kept in a cash ISA for example. Anything cash or remaining disposable income after that should go into a third pot – this is your nest egg.
The idea behind the third pot is that you are using disposable or accessible cash that you don’t need in the short or medium term, to build a nest egg. This may be where you would consider looking at investment options. In its simplest form, an investment is essentially the purchase of an asset with the hope of increasing its value over time. Investments typically include stocks and shares and funds. It’s worth noting here, that although investment returns may be greater than cash savings, there is of course the risk that when you invest, you could get back less than you put in.
Investments are generally used for longer term goals. This is because, when it comes to investing, time is your friend. The sooner you start investing, the longer you’re able to leave the money to grow and build your nest egg, the better.
To give an illustrative example, I recently came across a 55-year-old head teacher looking to retire at age 60. This particular teacher had already established their short to medium term savings and had approximately £50,000 held in a bank account and further savings in a cash ISA. They were aware that by keeping their savings in cash, the impact of inflation was in real terms effectively eroding its value. The headteacher’s goal was to be able to help their children with a house deposit in the future but they were unsure on how best to proceed. During a review, I was able to put this client in an informed position regarding their investment options and assess their attitude towards risk and show them possible options that they might be comfortable with.
Another consideration when thinking about saving and building a nest egg, is the lump sum payment at retirement – this could be anything from £10,000 to £250,000. The challenge here can be knowing what to do with it. If for example, you have already started to build your nest egg – that lump sum could be used to further build on and push it forward. The nest egg is something that you may spend yourself, or that you may not – it could be passed onto your children, or it may be needed for care home fees. There are a number of possible objectives as to how you could use a nest egg - the reality is often that some teachers may not have crystal clear objectives, but what they are sure of is that they want their money to grow above cash and inflation and know that it is there to reply upon in the future.
In terms of what the most suitable vehicle is for building your nest egg, will depend on individual circumstances, as is always the case with financial planning. However, tax efficiency is always the main overarching theme to ensure your money has the best potential for growth. This is where the input of a Specialist Financial Adviser can be extremely useful. They can assess your situation as a whole and help you to understand your options so that you are in a position to make well-informed decisions for your future.
Remember: The value of investments can go down as well as up and you may get back less than you originally invested.
Tax treatment depends on individual circumstances and may be subject to change in future.
If you would like support or guidance on understanding your financial position, speak to a Specialist Financial Adviser at Wesleyan Financial Services for a financial review by visiting: A better financial future for teachers. Charges may apply. You will not be charged until you have agreed the services you require and the associated costs. Learn more about our charges here.
About the author
Kevin McMenemy
Kenneth McMenemy is a Specialist Financial Adviser, from Wesleyan Financial Services, and has spent over 17 years supporting teachers, school leaders and their families with financial planning to secure their financial futures.
