Danielle asks: “I’m planning to move abroad with my partner in just under 2 years, I’ve just been gifted £5000 and I’m not sure where to put it. I was thinking S&S ISAs but since I’ll need to access it in short time I’m not sure where should I put it.”

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Q&A 75 – Where To Put 5k That I Need Next Year – Shownotes

Danielle asks:

I moved out 4 months ago. I’ve planned, budgeted, I’ve got a 3 month emergency fund and I’m taking £500 out of my paycheck each month and saving it.

I’m planning to move abroad with my partner in just under 2 years, I’ve just been gifted £5000 and I’m not sure where to put it. I was thinking Stocks & shares ISAs but since I’ll probably need to access it in such a short time I’m not sure it’s worth it.

Where should I put it?

 

Danielle, thank you for your question. As always with these types of question, the very first step is easy. Go and thank the person who gifted you that £5,000. Then, go and thank them again.

 

Budget And Understand Your Time Frames

But, after that, what do you need to do with this money. Well, you need to consider what you should do with it based on the overall picture of your finances. From your question, it’s clear to see that this is what you are doing, so good work.

You say that you have planned and budgeted, you have your emergency fund and you’re currently saving £500 per month after all of your expenses. Good stuff.

You then have thought about when you’ll need the money and what for: you say you’re moving abroad in under two years with your partner and you’ll need the cash then.

 

Should You Look Beyond Cash Accounts?

Now, the easy response is to say that you should just put it in a cash account (whether it be a current account, savings account or cash ISA). If you follow this advice, you should pick whichever account, or spread of accounts, which gives you the best fixed return (which will probably be between 3% and 5%).

However, I wouldn’t act quite so quickly. You mentioned S&S ISAs in your question and quite rightly. Most people will just say “if you are investing for less than 5 years, then the stock market isn’t for you”.

But, you need to look at it in your overall situation. How much do you need for that move in two years’ time? Do you need the full £5,000, or would £2,000 cover your expenses for the move? Also, you need to think about this in tandem with your other investments. Remember, you are putting away £500 each month.

So, let’s say that your best estimate is that you’ll need £4,000 in 18 months’ time. Let’s also imagine that you invest the whole £5,000 in a market tracking ETF through a S&S ISA today. You then invest £500 a month in the same investment.

I think it’s interesting to work out how much the market would have to fall so that you didn’t have the £4,000 that you need in 18 months’ time.

If we run the maths, if the market fell 12.5% every month for 18 months in a row, you’d still have £4,000 sitting in your investment account after the 18 month period.

Let’s have a look at the history of the stock market, and pick out some of the biggest ever stock market crashes over an 18 month period. We’ll use the DQYDJ S&P 500 returns calculator as it’s nice and easy to use. Each period selected is the worst 18 month period of that crash or recession:

• Wall Street Crash (1929): June 1929 – December 1930 = -43.9%
• The Dotcom Bubble (1999): December 1999 – June 2001 = -27.5%
• The Financial Crisis (2008): September 2007 – March 2009 = -49.4%

So, let’s take the absolute worst 18 month period of the S&P 500 since inception of -49.4% over 18 months. This would be a 3.7% monthly fall over that period.

If we place this against Danielle’s position, this would leave her with an investment amount of £8,687 after the 18 months which well exceeds her £4,000 requirement.

So, although your timeframe is only 18 months Danielle, depending on how much you need at the end of that period, then you may be able to handle the volatility of the stock markets.

 

 

Is The Risk Worth The Reward?

But, is it worth it? Well, for ease, let’s say that you can earn 8% per annum on average including dividends in the market, and 4% in cash accounts.

On average, your cash savings would be worth £13,329. However, if you invested in the markets using the assumption above, your average amount at the end of the 18 month period would be £13,656.

So, if the volatility doesn’t matter (which in the scenario we ran it doesn’t, but you’d need to run your own scenario), on average, it could be worth up to £330 more investing in the markets that investing in fixed accounts.

Personal finance is personal. You can’t say it enough. So, run your own figures with your own assumptions. If the worst imaginable case happened, what would it mean to you? And, is it worth taking that risk for the improved “average” result. In this scenario Danielle, if I were you, I would say that it is. However, I’m not you. You are you. And hence, you need to try to run these numbers for yourself to work out where is the best place for your cash.

My thinking here is different to the standard advice for savings towards a short-term goal, so I’d love to hear what you guys think. Let’s get some debate going in the comments below.

So, that’s us done for another week. Have a good weekend everyone!!

 

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