The “biscuit tin” approach to saving

A proven method families had once used to handle income can be modernised to help with portfolio allocation.

Summary: Back when there were one-income families, a biscuit tin was often used to store a portion of the money earned for day-to-day living expenses, while other funds were spent as the family pleased. This strategy can be usefully adapted in the modern era to help investors take a disciplined approach to portfolio allocation.
Key take-out: Older investors should consider allocating a portion of their funds to living expenses over a multi-year period, with the rest devoted into a series of growth investments – most likely divided between the share market and property.
Key beneficiaries: General investors. Category: Economics and Investment Strategy.

In this Eureka edition I want to divert from normal commentary into updating one of the oldest personal financial management schemes in the world: The “biscuit tin” approach to organising savings.

In a strange way it can be applied to organise your savings in the current environment. This is not a commentary on what to buy or sell but rather on how to organise money.

I can remember as a child watching older families manage their money by ‘Dad’ bringing home his pay in cash (you were paid in cash stuffed in ‘pay envelopes’). He proudly handed the envelope to ‘Mum’ who had containers or hiding places (call them biscuit tins) for the money required to pay expenses, ranging from daily deliveries from the milkman (milk was scooped into a ‘billy’ at the front gate), the baker who called each day, to electricity and the mortgage. Dad was then perhaps given a small amount back to take down to the pub.

This was the era of one income families. I was a bit surprised to see the bread winner in the family hand over his money but it was the way the family could exercise financial discipline. His job was to earn the money and his wife’s job was to allocate the spending.

Modernising the “biscuit tin” system

These days people are not paid in cash and there are many other stark differences in the way families are conducted, but for a large number of families that old style allocation of money can make a lot of sense. Indeed I must confess I sometimes use it. So today I am going to adapt the “biscuit tin” system to portfolio management for both younger people and also, in particular, older people.

In today’s world a large number of people who do not use a “biscuit tin” style approach to money management pay a huge penalty – it’s called credit card interest rates.

When you or members of your family are not paying your credit card before interest is charged it is time to replan your financial strategy or that of your family member.

You are much better off to rid yourself of your credit card by adding the debt to your mortgage. Use a debit card to manage your money in the way your grandparents might have done it.

And if you do manage your money properly you will be much happier and the family unit is likely to last much longer. I have no direct evidence to support this but I suspect credit card problems are often contributors to today’s high divorce rates.

A strategy for older investors

When it comes to investment portfolios people spend a lot of time trying to work out their stock selection process. And while that is important, of greater importance is first to work out the strategy. Many older people who are trying to self-finance their retirement and not rely on the pension struggle to know exactly what strategy to use.

Last weekend I was yarning to an veteran financial planner who offers advice to older people and advocates using a modern version the “biscuit tin” method. 

Firstly invest in cash (shorter term deposit type securities) enough money to get you by for the next three or four years. Clearly in the current environment these securities will not gain a lot of interest. But you will know that your ‘living’ money is in your biscuit tin until, say, 2018.

Also set aside money for a cruise or the next few years of the grandchildren’s education and put the rest into a series of growth investments. The idea is that you don’t worry about the market day-to-day because you know that for the next three or four years you have enough cash to meet your day-to-day needs. That is not a bad strategy.

As to where you will put your growth investment, you will probably divide your money between the share market and property most likely via trusts or investment companies. In other words, you’ve devoted your interest-bearing portion of your portfolio for your immediate needs and your growth portfolio separately. I realise this is an artificial system of saving but it does take away the immediate fear of sharp stock market falls.

Providing for the next generation

As for younger people, their allocation of savings will revolve around their mortgage and their education costs in the first instance. Obviously some money will go into superannuation. In the medium term prospering in today’s high mortgage and high education cost world is the main priority.

But grandparents who are well off will increasingly be looked to provide some of the education for the next generation of the family. And again this is a variation on the “biscuit tin” way of saving. Everybody is different but interestingly without actually thinking about it I have organised my savings in a very similar way. We set aside money for trips and for helping grandchildren and to pay living expenses. And that leaves other money for longer-term investments. And the good thing about such a system for older people is that you worry a lot less about your finances.

If you are younger you are more worried about your job than the level of the stock market but that changes as you get older. I hope this small commentary on investment strategies is a help.