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There are various options for putting some money away. You have the choice of regular savings accounts, ISAs, pensions, and other investments.
If you have started saving for one or more of these already, that is fantastic. However, financial experts advice that you should have a balanced savings plan. Doing so will allow you to enjoy today while preparing for retirement. If your financial future is crucial to you, consult a financial advisor (such as Portafina) before making any decisions is highly suggested.
Why save?
You might well have asked yourself this, especially during economic uncertainty or when money is scarce. However, money plays a massive role in your life, so saving money today can help you later on.
For instance, knowing you have enough set aside to cover significant events, unexpected emergencies, and the occasional luxury will give you more financial freedom and less stress.
How best to save your money?
Many people find saving challenging, not because they don’t have the money, but because they don’t understand how to save. Saving doesn’t have to be hard work, and it is much easier if you follow a few basic principles.
1. Be Realistic About Your Goals
Everyone has differing incomes and spending habits. Therefore, it is reasonable that everyone should have different savings goals. It is pointless trying to match the savings of someone else, as their circumstances are different from yours. Instead, create realistic and achievable savings goals for yourself. Doing so means you are more likely to turn your savings into a long-term habit.
2. Save Little and Often
Part of setting realistic savings goals is to save smaller amounts more frequently. Doing so will remove the pressure of finding large amounts of money to save. Also, the small chunks of money will grow to make a considerable difference in your life over time.
3. Become a Bit More Stingy
There is no shortage of opportunities to spend your money. Nights out, new clothes, and ever-increasing costs all compete for your earned money. Try using voucher and price-comparison sites to find deals and discounts. Doing so will provide you with additional money to put into your savings.
4. Utilise the Power of Money Pots
Compartmentalising your money into separate pots gives you greater visibility of your spending and enables you to save more efficiently. A good starting point is establishing one pot for everyday spending, another for emergencies, and a third for your savings. Later, we will discuss the best accounts for these money pots.
5. Adopt the Payday Savings Rule
Having decided on your savings goals, it’s time to allocate money to your savings fund. To help maintain your savings habit, you should adapt the payday savings principle. With this, you transfer money to your savings as soon as your pay arrives in your bank account. If you do, it will ensure you don’t have the opportunity to spend this money on other things.
Where to save your money?
We briefly mentioned money pots above, so let’s go into them in more depth. Here are some of the money pots we recommend to help you save.
1. Your Everyday Spending Pot
This pot is for the money you use for everyday spending on food, bills, and other monthly expenses. As the name suggests, you need daily access to these funds. Therefore, you must put them somewhere without restrictions on withdrawals. Current accounts are an excellent location, but you are unlikely to accrue any interest with these.
You might consider subdividing your everyday spending pot into separate ones such as food, travel, utilities, entertainment, and so on. You can then establish direct debits for your regular payments and maintain a pot of cash for those more sporadic spending.
2. Your Savings Pot
Short-term savings are excellent for covering more significant financial outlays such as large appliances, holidays, wardrobe updates, and big events. Savings accounts are the obvious location for these funds, as you will receive decent interest rates. However, some savings accounts have restrictions. As such, if you feel you’ll need speedy access to your money, you should ensure you find a suitable account.
3. Your Emergency Funds Pot
Many people choose to cover emergencies with their savings. However, if you aspire to use this money for something specific, spending it on an emergency could jeopardies your plans.
Therefore, you should consider establishing a separate emergency pot. Ideally, this money pot will be large enough just to sustain your living expenses for three months minimum. However, please don’t feel that you need to find this money immediately, as you can grow it gradually.
4. Your Retirement Funds Pot
Your retirement funds pot is crucial for income when you stop working. A pension is likely to make up a significant proportion of your retirement fund, and the good news is you’ve probably already got one.
Auto-enrolment, introduced by the government in 2015, means that all employees age 22 and over, and earning at least £10,000 a year, must be enrolled in a workplace pension scheme by their employer.
With workplace pension schemes, 4% of your salary gets paid directly into your pension. Another 1% is put in by tax relief, and your employer contributes 3%. The money you receive in tax relief and employer contributions is effectively free. Therefore, if you were to opt-out of the workplace pension scheme, it would be the equivalent of turning down a pay rise.
Personal pensions are a crucial part of retirement income, particularly with the demise of final salary pensions. Although such schemes promised a guaranteed income for the remainder of your life, they were costly to run. Therefore, very few companies operate them today.
Part of your retirement income will include the state pension. The full amount of this benefit currently is £179.60 per week. Although this is an excellent supplement to your retirement fund, it is unlikely to sustain your lifestyle on its own. After all, it is equivalent to a salary of £9339.20 per year. Therefore, if this is your only plan for retirement finance, you may need to have a rethink.
There are various pension schemes available from different pension providers. You should understand that not all pension schemes are the same. Some providers offer low fees and have an impressive performance record. On the other hand, others levy high charges while showing below-average results and performance.
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