An algorithm for long-term saving

  1. Determine the average monthly outgoings OUT for you and your dependents.
    • If most of your outgoings are going through a single bank account then check the outgoings for this bank account for the last 6 months and take the average.
  2. Determine how much of your average monthly income you could save. Let’s call this INS.
    • Fortunate people could save 10-20% of their monthly income.
  3. Set up a direct debit from the bank account in which you receive your monthly income to a savings account SAV.
  4. Set up a bank account called “Emergency fund” EMG for the unexpected challenges that life will throw at you (at the worst possible time).
  5. While the balance in EMG is less than 12xOUT move each month money out of SAV into EMG.
  6. After the balance in EMG is greater than or equal to 12xOUT move each month the money out of SAV into the following investments:
    1. 50% passive low-cost index funds (e.g. S&P 500 UCITS ETF (VUAG), FTSE Developed World ex-U.K. Equity Index Fund (VDWXEIA)).
    2. 50% high-interest rate, low risk savings (e.g. high interest rate savings accounts, bonds).

Adjust numbers as needed for your situation. You might optionally also consider creating an “Opportunity fund” easy-access savings bank account to which you can contribute monthly after step 5 above (if you want to have some cash ready for when rare investment opportunities arise).

Finally, do not touch the money in EMG unless really needed. It is very unlikely that life will not throw a curveball at you at some point, and when it does, having a financial safety net will be very useful.

· finance, saving