As someone who strives for simplicity in managing my money, lately, I’ve been finding this a trade-off with risk.
And I’ve been asking myself – so these actions that make my finances simple, are they increasing my risk level?
It goes without saying I am 100% on team KISS – Keep It Simple Stupid.
What does this mean in terms of finances? The world, especially the financial world revels in making life complex and appearing opaque. However, in reality, your own finances don’t need to be that complicated. I’m a great advocate of keeping things simple, and only have products and accounts that you need.
In my personal case, that means I have a mortgage, credit cards, current accounts and an investment account holding my ISA, taxable investments and SIPP. Have multiple accounts where it makes sense – what I mean by that is I have a spare current account and credit card. Moreover, I don’t have dormant accounts or accounts I don’t need. As savings rates are pitiful at the moment, I don’t have a savings account – I just keep a slush fund in my current account, which pays interest.
As someone who updates her numbers and net worth manually each month, it benefits me to have as few accounts as possible. As well as updating the updating workload, it also helps balance the risk.
What do I mean by risk? To ensure we are on the same page, I’d define risk as a potential that something could happen. And when we are talking about risk in this context, we usually mean something bad could happen. As we never ever call the markets suddenly rising or a lottery win a risk do we?
Personal Finance Risks
The modern financial world has many risks, but today I’m going to concentrate on personal finance risks.
Access to Money
Access to your funds is the number one risk that consumers should be concerned about. Here in the UK, there have been some serious bank access failures recently – with TSB being the most notable. A botched IT change caused customers to not be able to access their accounts for days.
In addition to the risk of your bank not giving you access to your money, all card payments also transact through payment companies such as Visa and Mastercard. And again, they have also failed recently leaving customer unable to make payments by certain cards.
These risks can be mitigated by having additional or spare accounts. Personally, I have a spare current account in case I need it. Additionally, I also hold spare credit cards for the same reasons – to provide access to funds if one network goes down.
All your money you have in accounts with banks, building societies and other financial institution could be at risk if the institution fails. In the UK, consumer deposits are protected up to £85k under FSCS protection. This means if the financial institution goes bust, you will get your funds back and they are guaranteed.
And this £85k is per institution – so you can split your savings across many institutions to ensure you are protected. Although this doesn’t apply to me nowadays as I don’t have that much in cash savings, I always make sure that I keep my cash balances under this limit.
And similarly to cash savings, investments you hold may also be at risk if that institution holds your investments goes into financial trouble. Hence most customers funds, shares and bonds are held in nominee accounts, which protects them from being considered assets of the institution.
However, personally, this is an area where I think I am carrying a little risk – the bulk of my investments are with one institution. I know they are in nominee accounts and all theoretically safe. However, in the unlikely event, something happens to the firm there could be a delay in getting funds. While I’m still working this is not a concern as I don’t need the money, but it is a risk I want to reevaluate when I stop working and perhaps take an alternative approach.
Being able to meet the current demands on your funds, and any demands due in the near future is essential. As I freelance this impacts me more than someone who works a salaried job and has similar expenses each money. Managing my liquidity, i.e. the amount of funds needed in cash to cover my outgoings at each time is complex.
Over the last year I have upgraded from my fag packet calculations and now use a trusty spreadsheet to model my cash flow and liquidity. By adding more of a system and process in each month, I feel more in control and hence I have more confidence in my numbers. And ultimately this lets me invest more, as I don’t need to keep additional funds in the slush fund just in case.
Market and Currency Risk
I didn’t want to leave out the more complex and nuanced discussions of market and currency risk. Needless to say, they are much, much more complex than a few lines here can ever cover. Nonetheless, I have spent years improving my understanding of the markets to a level I am happy with – and understanding my own personal risk tolerance to market cycles. Adding into that the additional currency risk as my currecny, the pound is very unstable lately.
Balancing Simplicity vs Risk
So, where do you stand on simplicity vs risk? How do you balance these? It’s easy to see that many of these risks can be mitigated by making things more complicated. You can open new accounts to balance the risks across many accounts. And you can even hedge and buy much more complex financial instruments to balance risks as well.
I wrote this article as I wanted to explore my reasoning behind how I manage my money – and to double check if I have the right balance personally between simplicity and risk? In summary, I feel comfortable about most things – with a tiny niggle about the brokerage I will revisit in the future.
Over to you
- What are your thoughts?
- Do you aim for simplicity?
- How do you balance risk with simplicity?
- Do you personally feel you have the balance right?