A survey by the Money and Pensions Service found that 21% of people rarely or never saved and that 22% have less that £100 in savings.
Getting into the savings habit
We’ve all been told it’s good to save, but what exactly are you saving for and where should you save it?
Why bother saving?
There are three main reasons for saving regularly:
- For emergencies: to make sure there’s money available if something unexpected happens, like your car breaking down.
- To fund luxuries: this might include a holiday or buying a new car, or things such as a tablet, computer or new phone.
- To live comfortably in the future: although it might seem very far away, once you stop working, your income will go down and you’ll probably have to rely on money you’ve saved to keep up your standard of living.
Emergency savings – how much is enough?
Everyone should prepare for sudden expenses by regularly putting money aside for things like a broken washing machine or boiler – but there is such a thing as too much emergency cash. It’s best to split your savings, so you’re keeping some to hand for emergencies and putting the rest where it can work harder for you.
How much should I save?
You want to be able to pay for an unexpected repair, but it’s also important to have enough money for a few months in a sticky situation. Say you lost your job or split up with your partner, and needed some time to get back on your feet – you’ll want a bit more than the cost of a new boiler or washing machine. If money’s short, start small For example, saving just £3 a day adds up to £1,095 over a year. As long as you’re getting into the savings habit, you’re making progress, and small sums quickly add up.
The rule of thumb
A good rule of thumb to give yourself a solid financial cushion is to have three months’ essential outgoings available in an instant access savings account. So if you lose your job, for example, it’ll help buy you three months to find a new one. So, if you spend £1,000 a month on mortgage or rent, food, heating bills and other things you can’t live without, you should aim for £3,000 in emergency savings. But, remember any amount saved will help you if you have to pay for something you weren’t expecting. Working out how much for your current situation You can also base the amount you think you’ll need on the expenses you think you might have to cover. So, if your car is getting old and has a couple of advisories from its MOT, you could factor in a figure of £1,000 into your emergency savings fund. These amounts might seem daunting at first. That’s why it’s important to break down your goals and take your time to save with manageable, smaller, regular amounts.
Should you save, or pay off loans and cards?
You will rarely be able to earn more on your savings, than you’ll pay on your borrowings. So, as a rule of thumb plan to pay off your debts before you start to save. Paying off your debt If you are paying more for your borrowing than you’re getting on your savings, then it makes sense to pay off your loans – so long as you can access funds in an emergency and provided you’ll not incur high penalties for repaying your loan. Once you’ve cleared your debts you’re freed up to save more and faster. If you have several debts to clear, aim to clear the most expensive ones first.
These are the most common examples:
- Most credit card debt
- Store card debts
- Unauthorised overdraft
- Catalogue shopping
- Pay-day loans
- Door-to-door lending (home credit)
Should I save or invest my money?
Wondering whether you should save or invest? The answer depends on your goals and your financial situation.
What’s the difference between saving and investing?
- Saving – is putting money aside, bit by bit. You usually save up to pay for something specific, like a holiday, a deposit on a home, or to cover any emergencies that might crop up, like a broken boiler. Saving usually means putting your money into cash products, such as a savings account in a bank or building society.
- Investing – is taking some of your money and trying to make it grow by buying things you think will increase in value. For example, you might invest in stocks, property, or shares in a fund. Are you ready to invest? Whether or not it makes sense for you depends on your goals – specifically if they are long, short, or medium term.
- Short-term goals – are things you plan to do within the next five years.
- Medium-term goals – are things you plan to do within the next 5-10 years.
- Longer-term goals – are ones where you won’t need the money for ten years or more.