Inflation is the silent destroyer of wealth. It will reduce the spending value of your cash holdings over time. But that’s okay if all you’ve got in cash is your emergency buffer and anything you plan to spend in the next 3 to 5 years. For all your other money, it should be invested to grow (i.e. beat inflation) over the long term.

Many investment companies try to sell you products promising the highest returns. But remember – your money’s main job is to support your lifestyle. Let me explain what you need in your financial plan.

You’ll need an emergency fund, different types of savings for different goals, and a clear plan before you start investing. Just like life, financial plans need to be flexible because unexpected things happen.

Start with your emergency fund. We like to suggest at least 3 months of net income as a minimum (ideally at least 6 months). This money should be readily accessible. The right amount is whatever helps you sleep at night. While keeping lots of cash isn’t the best way to grow your money in the long run, it can make you feel more secure. This security is important. If you have a job, having at least 6 months of your take-home pay in the bank can create resilience if disaster strikes, giving you time to get back on your feet. If you’re employed, it’s also worth exploring what benefits your company offers if you can’t work for a long time.

Next, think about any big expenses you’re planning in the next 3-5 years. This could be a vacation, home improvements, buying a house, or a wedding. Keep this money safe too. You might earn more interest by putting money in fixed-term savings accounts if you won’t need it for a while.

After setting aside your emergency fund and savings for upcoming expenses, invest the rest of your money to beat inflation. Yes, inflation will reduce the value of your emergency fund and planned expense money – but that’s normal. These savings are there to protect you when times get tough or when markets go down. After protecting your emergency money and planned expenses, invest your remaining money for long-term growth. You can invest long-term money more aggressively based on how much risk you’re comfortable with. This helps you save for retirement or big future purchases.

Other goals – like paying for children’s weddings, travel during retirement, or education for grandchildren – need careful planning. Think about how much these things cost now, how prices might rise, and whether you can be flexible with timing if you don’t have enough money. Would you take more investment risk to potentially reach your goals faster, or would you rather take longer if investments don’t perform well?

Once you know how much money you need and what investment returns you expect, you can figure out how much to save. If you have a specific budget, you can work out what long term returns – and therefore what investment risk – you need to take to reach your goals.

How do you feel about your money situation?

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