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 it? Not putting all your eggs in one basket.

Setting aside an amount that can help achieve future goals and respond to unforeseen events is, for many, a comfortable idea, 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 vary depending on central bank policy, a return that may seem attractive will probably not 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 savings will always be the objective and the first rule to achieve this is related to the old saying “don't put all your eggs in one basket”.

Not putting all your savings into a single application is a key concept – of risk and return diversification – but it is only the first one to consider. It is also important to consider how to divide the saved capital and what level of risk each person is willing to assume in relation to the amounts intended to meet the different objectives throughout life – current ones, those defined for the coming years and those that may arise in the more distant future.

Excessive risk can lead to capital losses, but the opposite can be equally unfavorable, particularly in periods when inflation persists and 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 which can therefore be invested in the medium term. Depending on each person's stage of life, expenses and plans, the return can help replenish the current account and make future plans a reality, or serve to reinforce savings. 
• The third basket will contain the amount that you do not plan to use for many years and that can serve as a reserve for larger expenses in the future, such as helping your children buy their first home. Eventually, there may not even be a set goal for this amount and it will be a legacy 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 insight and active management of investment experts, who are continually spotting risks and opportunities across different asset classes, sectors and regions.

How to build each basket?

To begin, you should calculate your annual expenses and put around three times that amount in the first basket. This is because economic contractions have historically lasted, on average, up to 18 months and guaranteeing an amount that covers expenses for twice this time 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 steady source of income – salary from a job, income from property or returns from a business – that covers expenses and a desired standard of living, can opt for a higher value and risk to obtain greater growth of invested savings. 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, made up of values that can be set aside until later in life, can assume a higher level of risk and benefit from long-term capitalization. This basket may include, for example, allocation to private assets, which requires a reduction in liquidity and returns over a longer horizon. However, it is possible to keep these assets in investment structures that allow them to be transferred quickly to children or grandchildren.