Saving for goals
You've got cash to spare at the end of the month. You're ready to save it rather than spend it, but where do you start?
Emergency fund
Make this your first aim: a couple of months' salary put aside for unexpected costs. If you don't have an emergency fund, fixing your boiler or car has to go on your credit card or overdraft. And that means you'll be paying extra interest as well as the bill itself.
How to save:
- Set aside a regular amount, say 5% of your salary each month. After a while you'll barely notice it's gone. Just £50 a month will add up to more than £600 after a year, once you include any interest that you'll earn.
- Transfer the money soon after you're paid as this helps you budget.
TIP: Saving in a Cash ISA is a good way to save for the short term. Under current rules the money earns interest tax-free but you can access it when needed.
Short-term goals
When you've covered unforeseen spending, think about other goals.
Saving up in advance for a holiday or car is much cheaper and more satisfying than using a card or loan and repaying the money (plus all the interest) later. If you put a holiday that costs £1,000 on a credit card charging 16.9% APR, you'll pay an extra £169 in interest if you take a year to pay it off in equal instalments.
Some short-term goals might involve a big outlay, like a wedding (average cost: £14,500*). If this is your target, earmark extra cash, like a work bonus, for your goal.
TIP: If you're saving for the short term, you need access to your money. A Cash ISA is a great way to avoid paying tax on the interest.
Case Study 1
Emily and Matthew Commander, 29 and 27
Time to save for wedding: 1 year.
"We wish we'd started the savings habit early."
Source
*compareweddinginsurance.org.uk
Saving for a wedding
Emily and Matthew Commander, 29 and 27
"We were really lucky to get help from our parents for some of the big expenses such as the marquee and the drinks, but we wanted to save as much as possible to make our day extra special."
"We had just over a year to save so we opened our first joint savings account and saved £200 a month into this. We found this quite a challenge as we hadn't really saved before but knowing we had a goal - the wedding - made it much easier."
"We're still saving too. Having put the money away for the wedding we decided to keep saving the same amount each month. We don't really miss the money and it's good to know it's growing into a nice little nest egg."
What we'd do differently: "We'd never really saved before we decided to get married and I wish we'd started earlier. It was great to be able to spend the wedding savings on making our big day extra special and we love the fact we're still saving. Who knows what expenses lie ahead of us."
Longer-term goals
Setting longer-term goals is a great way to get into the saving habit and stay in it. The earlier you start, the less you have to pay in total as there's more time for the money to grow.
Longer-term goals might include:
Getting on the property ladder
The average first-home deposit is around £32,600* right now. A couple saving £200 a month each would need to save for just under seven years to build up that amount.
Your children's future
Kids are expensive, especially helping them with university fees (currently £8,500** a year) or onto the property ladder. Try this: pay child benefit into a Cash ISA. (The allowance is currently £20.33 a week for your first child, although it will be means tested in future.) By the time your child is 18, you'll have more than £19,000 in the account.
Your retirement
The ultimate long-term goal. Start early and your money has a long time to grow. So, compared with starting later, you need to put less aside each month to achieve the same income once you stop work.
How to save for longer-term goals
Even small amounts can build up into a decent savings pot over time. So divert any extra cash that comes your way into your account. Putting money into a pension means that you can't dip into it.
Think about investment-linked savings: it is higher risk but you have the potential for higher growth over the longer term.
TIP: As you're saving a substantial amount, protecting the money from the taxman is a must. ISAs are a great way to do this.
If you want to keep risks to a minimum, you might consider a Cash ISA.
If you're comfortable taking on risk for the potential of higher returns, a Stocks and Shares ISA is a great first step into tax-free investing and a useful addition to a pension when you're saving for retirement.
Which brings us to pensions, the most tax-efficient way to save for retirement. Every time you pay 80p in, the government pays 20p in as well. You could get a bigger boost if your employer pays into your pension, it's the next best thing to free money.
Case Study 2
Helen Gilbert, 34
Time to save for deposit: 4 years.
"Save before you spend each month."
Source
*Land registry
** Office for Fair access (OFFA)
Saving for a deposit
Helen Gilbert, 34
"I didn't graduate until I was 23 so when I started working I was keen to get on the property ladder as soon as I could."
"I'd already got a bit of a head start on my savings by living at home when I was at university and working at the local paper. I continued to live at home after graduating. When I started working I focused even more on my savings and, over the next four years, I put money into cash ISAs, savings accounts and premium bonds until I'd built up £30,000 for a deposit on my first home."
"It was a great feeling knowing I’d saved enough to do this myself."
What I learned: "My top tip is to save before you spend, rather than relying on having money left at the end of the month. Siphoning off a small amount into a savings account before it hit my current account meant I didn't really miss the money and over time it turned into a decent lump sum."
Saving is much easier when you know how
1. Decide your goals
Work out why you're saving, and set yourself targets, such as £500 by Christmas.
2. Come up with a plan
Decide how much you can afford to save each month and work out how long you'll have to save for.
3. Keep the money separate
Put the money in a dedicated account, so you're not tempted to spend it.
4. Stay in the habit.
Save something every month, even if it's only a small amount.
5. See how it is performing
Keeping track of your savings so you know how you're doing will keep you motivated too.
6. Top up when you can
Increase what you save as your income goes up, or when you pay off a loan, divert the extra cash you have each month straight into your savings.
