There are many ways to save your money, including savings accounts, ISAs, pensions and other investments. If you are already saving using one of these financial vehicles, then that is great. However, you should consider having a balanced savings plan. Doing so will enable you to enjoy today while making preparations for your future.
Why should you save?
This question is a relevant one, particularly at times of economic uncertainty when money can be tight. Money plays such a significant role in our lives. Putting some aside for significant events, treats, or unexpected emergencies can provide you with greater peace of mind and more financial freedom.
Best ways to save your money
You might think that saving is a demanding task. However, following a few fundamental principles makes it easier for saving to become a manageable and enduring habit. Here are a few tips on developing a balanced savings plan.
Have a realistic target.
Everyone has a different amount of income and expenses. Therefore you should make your savings targets realistic and suitable to your situation. Coming up with some arbitrary figure, or trying to match savings targets set by friends and family, is pointless.
Doing so will set you up for failure because such a setback will put you off saving in the future. The key to success it’s to set realistic individual targets, save as much as you can. Planning for your long term future is crucial; when considering your pension, take on expert advice from a specialist such as Portafina.
Save little and often.
Tied into the concept of having a realistic savings target is to save little and often. Doing so provides you with the shortest way of developing and continuing with your savings habit. Saving small amounts of money regularly means you put less pressure on yourself. Over time the small amounts will grow into a substantial pot which will have a significant beneficial effect on your life
Become a little bit stingy.
Today there is no shortage of ways to part with your hard-earned money. Days out, restaurant bills, updating your wardrobe, and purchasing the latest gadgets put significant pressure on your ability to save.
Saving doesn’t mean you have to give up all the pleasures of spending your money. It just means you have to become a little bit more stingy when you do spend. For instance, instead of purchasing something straight away, check on comparison sites for a better deal. Alternatively, search for vouchers online as these can provide significant savings on day-to-day essentials.
Harness the power of money pots.
Having your money separated into different parts will make it much more straightforward to manage and make saving easier. You could have one money pot for your day-to-day expenses, one for short-term savings, another as an emergency fund, and a long-term pot for your retirement. We’ll go into money pots in more detail a bit later on.
Adhere to the payday savings principle.
When you have set up your various money pots, put a realistic amount of money into each one. You should transfer this money into each pot as close to payday as you can. Will guarantee that the money you have allocated to saving gets saved and not spent. It will also help you understand how much money you have available for the remainder of the month.
Your money pots
So how should you save your money and where should you put it? Here are a few money pots you should consider setting up for your savings and spending:
- Daily expenses. This pot is suitable for covering your regular spending such as food bills, transport, and so on. As you need this money daily, it needs to be kept somewhere where you can access it without any restrictions. An excellent location for your daily expenses money pot is a current account. As you get used to money pots, you may want to consider subdividing your daily expenses pot into individual parts for food transport bills, etc.
- Short-term savings. You can have a short-term savings pot to cover more significant expenses such as new clothes, household appliances, and important events such as holidays. As you won’t need this money immediately, you can afford to put it in a savings account to get higher interest. However, you should be aware that some savings accounts come with restrictions. For instance, you may only be allowed a certain amount of withdrawals throughout the year. Bear this in mind when selecting the account for your short-term settings.
- Emergency fund. Although you could combine your emergency funds with your short-term savings pot, keeping them separate is a good idea. Your emergency fund is designed to cover unexpected events such as car repairs, losses, or damages. Ideally, your emergency fund should have enough money to cover at least three months of living expenses.
- Retirement pot. The most common way to fund your retirement is through a pension. The good news is that you’re probably already contributing to your retirement funds through your workplace pension scheme—a bit more about these below.
Workplace pensions, auto-enrollment, private and state pensions
Currently, if you’re employed over 22 and earning more than £10,000 per year, your employer has to enrol you into their workplace pension scheme. This procedure is known as auto-enrolment. You contribute 4% of your gross salary each month to your workplace pension. Due to tax relief on pension contributions, you received another 1% back from the government. Additionally, your employer must contribute a minimum of 3% of your gross salary. As this is money you would not typically have were you not enrolled in a workplace pension, it is effectively free.
Since the decline in the employers offering final salary pension schemes, personal pensions have become increasingly crucial in providing for retirement. Paying into such pension schemes regularly throughout your working life will provide you with an income when you retire.
The current full state pension is £179.60 per week, equating to an annual income of around £9,339. You should consider if this will be a sufficient amount of money for you to have the retirement lifestyle you have anticipated. If it is not, you will need to have other sources of income for when you retire.
When you consider taking out a personal pension, you should understand that they are not alike. Some will perform well and have no charges, while others will come with higher costs and may underperform. Don’t simply set up a pension scheme and make regular payments expecting it to perform as planned. You should review your pensions regularly, checking they remain on track and that high charges or not are not eroding your investment.
There are plenty of ways to save your money, and it is a great habit to get into to vote for today for when you retire. Having a balanced savings plan will mitigate the financial risks of everyday life, ensuring you have a better chance of enjoying a comfortable retirement.