Understanding your energy usage
With so many different demands on your money, getting into the savings habit can seem like a tough ask, but slotting money away is a vital part of financial planning.
An emergency fund can provide an important buffer against periods of insecurity, while longer-term savings can help you work towards future goals, such as buying a house, getting married, going on a big trip – or making a major purchase, such as a car. Having savings gives you both security and freedom.
While returns might not have been much to write home about of late with the base rate having been at an all-time low, you can’t afford to give up on putting money aside.
Here we take a closer look.
Saving money is a habit. And, like going to the gym, once you start noticing the benefits, it becomes easier to do.
If you’re struggling to squirrel away as much as you’d like to, look at your routine and see if there are areas you could change things to free up more cash to go into savings.
Setting a goal you want to reach – and a time period in which you want to reach it – can help you stay on track.
While there’s no set amount that each of us should slot away each month – as this will vary depending on a person’s individual circumstances and income – but there are some helpful guidelines.
A good guide for budgeting is the 50/30/20 rule. This is where you look to spend around 50% of your income on essentials such as mortgage or rent, food and bills, 30% on ‘fun’ things such as shopping and socialising – and then the remaining 20% should be kept aside for savings.
Equally, when building an emergency fund, as a rule of thumb, you should look to have between three and six months’ worth of expenses slotted away.
Once you get into the savings habit, before you know it, you’ll start to amass a nice little nest egg.
Slot £50 into savings each month, and you’ll have a pot of £600 at the end of a year. Continue in this way, and you’ll have £3,000 after five years.
Increase your monthly savings to £100 and after 12 months, your pot will have grown to £1,200. Remain disciplined, and after five years, you’ll have £6,000.
The key is to be realistic; choose an amount you can be sure you can stick to.
While you’ll have to accept that you’ll need to be flexible at times, as emergencies will crop up, be disciplined about putting even a small amount away each month.
Also, if your salary increases over time, it’s worth increasing the amount you slot away each month in line with this.
When it comes to savings accounts, there are lots of different options to choose from.
It's important to keep your savings separate from your everyday spending, because if you hold your savings in your current account, you may be tempted to spend that cash.
If you’re going to need to get your hands on your money, you’ll need to keep it in an easy-access savings account. Slightly higher rates are available on notice accounts, but you will have to give a few months’ notice before you can get access to your money.
Some of the very best rates available are on fixed-rate bonds, but these accounts require you to lock your money away for even longer, typically between one and five years.
With so much talk about rising rates, you may be wary of fixing, and may want to ‘wait and see.’ But this is a risky approach, as we can’t guarantee when the Bank of England will raise rates – or whether providers will pass the rise on. As a compromise, you could think about fixing for a shorter period of just one or two years.
While it’s not wise to keep savings in a current account, some current accounts come with regular savers attached. A regular saver is an account into which you have to deposit a set amount every month. On the plus side, these often come with decent rates, but on the downside, they tend to impose rigid T&Cs.
When thinking about savings accounts, don’t forget individual savings accounts (ISAs). You get an ISA allowance of £20,000 each year, but if you don’t use it, you lose it.
The best way to make sure your money is working as hard as it can is by shopping around to find the best rates available. With inflation currently running high, you also need to take steps to protect your finances from the eroding effects of inflation. Make sure your money is kept safe by checking the provider is covered by the Financial Services Compensation Scheme.
Tread carefully, though, as some of these offer pretty paltry levels of interest on your hard-earned cash.
If the idea of slotting away a set amount each month sounds a bit dry, you could set yourself a challenge instead. This can be a great way to have a bit more fun with your savings.
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