Savings: what to do with them?

November 2024 by Mario Pires

Saving can, and should, be more than creating a reserve and keeping money idle. Increasing the value of savings should be one of the main objectives. How to do this? Not putting all your eggs in one basket.

Putting aside money that can help you achieve future goals and respond to unforeseen events is a comfortable idea for many, but saving can and should be more than creating a reserve and keeping money idle.

Depositing it in a term account is perhaps the most obvious option, but since interest rates fluctuate depending on central bank policy, a return that may seem attractive is unlikely to last for many months. What’s more, the interest you will receive will hardly compensate for inflation. So instead of sitting idle, this money is losing its value.

Increasing the value of your savings will always be the goal and the first rule for achieving this is related to the old saying “don't put all your eggs in one basket”.

Not putting all your savings into a single investment is a key concept - diversifying risk and return - but it's only the first to consider. It's also important to consider how to divide up the capital saved and what level of risk each person is willing to take in relation to the amounts they want to achieve in order to meet the different objectives throughout their lives - current goals, those set for the next few years, and those that may arise in the more distant future.

Excess risk can lead to capital losses, but the opposite can be equally unfavorable, particularly in periods of higher inflation when protecting the real value of money requires greater proactivity.

Three baskets, three horizons of savings and investment

Next, you need to group your financial requirements and objectives into different time horizons - and then organize your assets into different baskets that correspond to each horizon. Three baskets are recommended for three horizons:

• The first basket can be seen as a current account . With minimal investment risk, it will be used to finance everyday expenses and short-term plans. 
• The second will contain savings that are not expected to be used in the near future and can therefore be invested in the medium term. Depending on one's stage in life, spending and plans, the return can help to replenish the current account and make further plans, or serve to reinforce savings. 
• In the third basket will be the amount you don't plan to use for many years and which can be used as a reserve for bigger expenses in the future, such as helping your children buy their first home. You may not even have a goal set for this amount, allowing it to be an inheritance for the next generation.

In practice, to diversify returns and risks, each basket should include different applications, incorporating accounts, investment funds, pension funds and other tax-efficient structures. These portfolios will benefit greatly from the vision and active management of investment experts, who are continuously detecting risks and opportunities in different asset classes, sectors and regions.

How to build each basket?

To begin with, you should calculate your annual expenses and put around three times that amount in the first basket. This is because economic downturns have historically lasted up to 18 months on average and guaranteeing an amount that covers expenses for twice that long provides a long and comfortable “cushion” if other sources of income are reduced. And this without the need to sell assets at times when markets may be down.

The value of the second basket and its level of risk will depend on the stage of life each person is in and their expenses. Those who have a certain source of income - salary from a job, income from property or returns from a business - that covers expenses and the desired standard of living, can opt for a higher value and risk in order to obtain greater growth from the savings invested. Closer to retirement, for example, a lower risk level may be more comfortable.

Together, these two baskets should cover financial needs for the foreseeable future. This means that the third basket, made up of securities that can be put aside until later in life, will be able to take on a greater level of risk and benefit from long-term capitalization. This basket can include, for example, allocation to private assets, which requires reducing liquidity and returns over a longer horizon. Moreover, it is possible to keep these assets in investment structures that allow them to be transferred expeditiously to children or grandchildren.