You have plenty of options available for putting money away for a rainy day. ISAs, savings accounts, and even current accounts allow you to save money quickly.
If you have already started saving, that is excellent news. However, to maximise your savings efforts, you must have a balanced plan. Having a balanced plan for your savings will mean you can prepare for the future while enjoying the present.
Why save?
This question is pertinent, especially during uncertain economic times when money is tight. However, money plays a vital role in our lives, and having some put aside for the future is prudent. Saving can help you achieve financial freedom and give you more peace of mind in coping with unexpected financial commitments. Avoid financial mistakes, make use of regulated financial advisors such as Portafina before you jump in to big decisions that could affect your future.
How to save?
Saving can seem like hard work. However, by adopting a few simple principles, you can develop a straightforward and sustainable savings habit.
1. Set realistic targets.
Your income and spending will be different from other people's. Therefore, there is no point in trying to replicate the savings targets that other people have.
If you try to match what other people are saving, you're setting yourself up to fail. These setbacks will sap your morale and deter you from saving.
2. Save smaller amounts, more often.
Saving smaller amounts more regularly will reduce the pressure on you. Therefore, you'll be more likely to continue with your saving habit. Over time, these small savings will accrue into a significant amount of money that will make a considerable difference to your life.
3. Be a bit more stingy.
There are plenty of opportunities to part with your money. Nights out, new clothes, restaurant bills, and so on all put pressure on you to spend. To help your saving efforts, try to use price comparison sites or search online for discount vouchers. These can make a considerable difference to your daily spending habits.
4. Utilise money pots.
Dividing your money into different money pots is an excellent way to become more organised financially and help your savings efforts. For instance, you could have separate money pots for your daily expenses, short-term savings, and retirement investments. We'll discuss the best options for these different pots later on.
5. Adopt the payday savings rule.
Once you've decided to put some money away every month, you need to ensure you save that money. The best way to guarantee you do this is to transfer the funds into your savings pot as soon as your pay arrives in your bank.
Doing so will mean you have no opportunity to spend it before saving it. It will also mean that you know exactly how much you have left to spend for the rest of the month.
How and where to see if your money.
Let's have a look at some of the different pots you might want to consider to manage your money.
Your day-to-day pot
Your day-to-day money pot exists to cover your regular monthly expenses including food, commuting, bills, and so on. Because you need this money regularly, you will need to have it somewhere that allows you easy access. A current account is likely to be your best option for this pot. However, you are unlikely to receive any interest on the money within this type of account.
You may decide to subdivide your day-to-day pot into separate pots for bills, food expenses, and travel. Doing so means you can allocate a specific amount of money to each of your spending categories, which will help you with your budgeting.
Your pot for short-term savings
For more considerable financial outlay such as holidays, household appliances, or significant events, you should set up a pot for short-term savings. Using a savings account for this money is a good idea, as you will receive interest on your savings.
However, many savings accounts restrict access to your funds or the number of withdrawals you can make. Therefore, consider the access you will need and shop around to get the most suitable account.
The emergency fund pot
You could place these funds in your short-term savings pot, but keeping them apart is also a good idea. Doing so means you have dedicated money for dealing with unexpected events or emergencies including car repairs or equipment breakdowns.
Your emergency fund pot should ideally have enough money in it to cover between 3 to 6 months’ worth of living expenses. Although this may seem like a lot of money initially, you do not need to find it straight away and build it up over time.
Your retirement pot
A crucial part of your long-term financial strategy is your retirement pot. Recent changes to workplace pension auto-enrolment mean that establishing a pension fund has never been more straightforward.
If you are employed, aged over 22, and earn at least £10,000 annually, your employer has an obligation to enrol you in a workplace pension scheme. You contribute 4% of your gross salary to a workplace pension. A further 3% tops up these contributions from your employer and 1% in government tax relief.
With the reduction in final salary pension schemes, workplace and personal pensions are becoming more significant in retirement plans. Although final salary schemes promise to pay a specific amount each month during your retirement, they were costly schemes for companies to run. Therefore, they have been phased out in all but a few circumstances.
The State Pension
When you reach the qualifying age, you will be able to draw your State Pension. Currently, the maximum State Pension is £179.60 a week, or an annual income of around £9339. Although this amount is unlikely to be sufficient to sustain the lifestyle you desire in retirement, it serves as a valuable supplement to any personal and workplace pension you have.
If the State Pension is currently your only financial provision for retirement, you should consider establishing a personal pension pot. When setting these up, you should remember that not all personal pension schemes are the same. The charges you pay are likely to vary, as will the features of different pension schemes. You may want to consult with a pension specialist before committing to any long-term financial investment.