Layering your cash accounts

In order to manage personal finances, you will need to hold some of your net worth in easy access bank accounts. These accounts may pay interest, but for the purpose of this article, you should exclude fixed term accounts which offer a penalty if withdrawals are made early.

It’s relatively easy to monitor these accounts and calculate a total cash value as frequently as you need. However, thinking of this number as one giant pot of cash is likely to lead to poorer financial outcomes in the future if you hold too much.

If you divide your cash balance into layers of intended purpose, you can make better ongoing decisions about managing your finances. This is much better to do as a spreadsheet exercise rather than trying to physically partition money into different accounts.

The layers I used when I was working were:

  • current cash flow. This month’s spend before next the next income arrives.
  • emergency fund. The amount I set aside for unexpected financial events.
  • deferred consumption. Things I’m saving for that I am certain will occur in the foreseeable future.
  • excess funds for investment. The difference between the total cash balance and the three layers above. If this gets too large, then I will look to purchase long term investment assets.

When I had a regular earned income, the last layer was where I made my regular contributions from.

It’s not a precise science, rounding up to the nearest £’000 for each layer would make sense. Just don’t allow the excess fund layer to grow too large because you are missing out on future investment return, and large amounts are not easy to deploy tax efficiently due to annual limits on ISA and SIPP.

Since I stopped working, the last layer isn’t needed. Instead I replace it with:

This layer provides some protection against forecasting risk and total return risk and allows me to sleep at night without worrying what equity markets are doing.

It also allows me to do some immediate discretionary spending. For example, I bought a car which depleted the sequence of returns buffer. I then chose appropriate points in the next few months to sell slices of my investment portfolio to top it up.

Read more on this topic . . .


I am not your financial adviser.

The information in this post relates to my financial journey. It may or may not be relevant to your own. You need to make your own decisions on your own financial strategy.

Do not buy or sell anything based solely on what you read.