Ms ZiYou Simplicity vs Risk
Money

Balancing simplicity and risk when managing your money

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?

Simplicity

It goes without saying I am 100% on team KISS – Keep It Simple Stupid.

Financial Simplicity

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.

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.

Savings Protection

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.

Investments Protection

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.

Liquidity

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?

Thank you for reading – please leave a comment below and join in the conversation. You can also connect on Twitter or contact me privately.

6 comments on “Balancing simplicity and risk when managing your money

  1. Sounds like a sensible setup.

    A few observations:

    – the bank guarantee is per banking license rather than per institution. That means the £85k guarantee can (and often is) shared across multiple retail banking brands.

    – the diversification of exposure to institutions should incorporate your freelance company’s accounts also. Having your business account frozen because of some identity fraud transactions on your personal credit card makes it hard to pay staff, the tax authorities, etc!

    – a big risk you haven’t mentioned is home market bias/exposure. In these times of great uncertainty it is worth revalidating the premise that everything should be held in GBP. It may be easier and familiar, but has the potential to be an expensive decision over the next few years, so deserves some conscious thought.

    1. Hi, yeah nowadays I think most people know which banks are linked.

      That’s a good point about business accounts – mine is not linked in any way to a personal account so I’m ok there.

      Home bias is whole different ball game – I am still biased to the UK at around 15% allocated vs the 7% or so true global market share. So most of my underlying assets aren’t in GBP, but the funds that hold them are. My thinking is having an account in foreign currencies would end up more hassle and costly than just letting the ETFs do the conversion. But I haven’t really attempted to go down that rabbit hole and price them all out.

  2. I think in your case, you have a very large portfolio so perhaps it would be worth considering splitting some of that or perhaps leave intact but put new funds into a different broker. It needn’t add too much complexity to your set up – you just invest in what you would normally invest in with your existing broker, eg set your usual standing order/direct debit.

    I’m slowly making things more simple – I quite like tinkering with my spreadsheets, but I realised that having bits here and there (eg my P2P) really isn’t adding much to my portfolio so I’m slowing exiting those accounts – at least it’s not been a complete waste of my time and I have made some gains.

    I have a lot of old savings accounts from back when interest rates were decent and have several current accounts for different purposes, eg emergency fund, matched betting, BTL etc. Hadn’t really thought about risk of not being able to access bank accounts until recently, with the TSB IT fiasco. And when Visa had issues earlier in the year, I realised that all my credit and debit cards were Visa, so now I’ve got a Mastercard debit card, just in case.

    Not being able to access funds from my investments has been on my mind – originally, I opened a second account for my ISAs/SIPPs due to cost but it made sense to have them with different providers. It’s likely I’ll open another one at some point. I’ve also seen arguments for not investing all in with the same group, eg all Vanguard so although a lot of my index trackers/ETFs are with them, I’m not 100% with them. Not that it’s likely something will happen to them but you never know.

    1. Thanks Weenie – I’m not worried enough to open another brokerage now, but when they next start fiddling with charging structures I’ll be primed to start reading that monevator table and looking at the possibilities. And yeah, a lot of my ETFs are BlackRock – which is surely in the too big to fail category nowadays. And when I stop working I’ll spread things around a bit more, as I want have the security of having income coming in.

      And yes, I’ve also got a few P2P accounts I’m running down – they are still paying decent interest so I’m just letting them trickle down now. I do think they might get hit when the next recession comes, so I don’t think I want to be in P2P long term at the moment.

  3. I will make things more complex. Way more complex. I have a single point of failure in my setup (as indeedably pointed out to me). A lot of shares in the company I work for. If the company goes bust I lose my job and the shares. It’s not the entire story as the largest part of my portfolio is the equity I hold in my home, but still. The more company shares I get the higher the risk. I will move the money across various asset classes to mitigate risks, such as crowd lending (multiple platforms to mitigate the risk that a company behind a platform goes bankrupt), stocks (index trackers probably), perhaps a bit more real estate.
    Right now I am not too concerned about liquidity, but as I get closer to early retirement age this is definitely going to be a concern.
    It makes sense you think about risk the way you do. I always try to be as rational about it as possible and don’t want to fall into the trap of over insurance or over securing against risk. I take just enough measures to feel comfortable – which is closely linked to my risk tolerance – and then leave it.

    1. Ah yeah – that indeed is a risk having lots of things linked to the company you work for.

      And yes, everyone’s risk tolerance is so individual, I agree the key is finding what works for you and your situation.

What do you think?