There are plenty of opportunities for you to put some money aside for a rainy day. These include current accounts, savings accounts, ISA‘s, pensions, and other investments.
That is excellent news if you’ve already started to save into some of these. However, if your savings plan isn’t balanced, you may not be making the most of your money. Therefore, read on to understand the importance of a balanced savings plan.
Why should you save in the first place?
You may have asked yourself this question, especially when finances have been tight. However, money has such an influence on your life that it is crucial to have some put aside for unexpected events, large purchases, or other significant expenses. Saving will also provide you with greater peace of mind and put you on the path to financial freedom. If your financial future is important to you, it is highly recommended you engage with a financial advisor (such as Portafina) before making any decisions.
How to save.
Some people can find saving hard work, and it is certainly not as much fun as spending! However, by following a few simple principles, you can make saving easier and develop it into a lasting habit.
1. Set realistic savings goals.
Everyone has different income levels, lifestyle aspirations, and spending habits. Therefore, your savings goals should reflect your circumstances.
It is pointless replicating the savings goals of friends and family. Doing so will only lead to you failing to hit your targets, becoming demotivated, and ultimately giving up saving altogether.
Therefore, set realistic savings goals that you can achieve. Doing so will allow you to stick to the savings habit until it becomes your everyday behaviour.
2. Save a little and often.
The step follows from the previous one of being realistic about your savings goals. Saving small amounts regularly places less pressure upon yourself, which means you can slowly and steadily build up a significant amount of money.
3. Become a bit more stingy.
Try to save money whenever you can. The digital revolution has provided countless voucher and comparison websites that help you save money on everything from dining out to buying new clothes. Make the most of these to cut back on your spending.
4. Establish separate money pots.
Having separate money parts for your different spending categories will make it easier for you to save. To begin with, you should establish a pot for day-to-day expenses, a retirement pot, an emergency fund pot, and a savings pot. We’ll discuss money parts in a bit more detail shortly.
5. Adopt the payday savings principle.
Having set up your savings money parts, you can then put a realistic amount of money and each one. Of course, there is always the temptation of spending to jeopardise your savings plans.
To get around this temptation, you should adopt the payday savings principle. With this, you will transfer money into your savings pot as soon as your pay arrives in your bank account. Thereby, you remove the temptation to spend it on other things.
How to save
We will now look at the various money parts you can set up to manage your money and improve your receiving opportunities.
Your daily expenses money pot.
This pot is the one you will use the most as it contains the money you need to pay for your daily living expenses, such as household bills and food. You should keep this money somewhere that allows you immediate access, and a current account is ideal. However, interest rates on current accounts are minute, so shop around to try and get an account that provides at least some interest.
You may find that you want to further subdivide your daily expenses money pot. For instance, you might want to separate utilities from food expenses and give a separate account to your travel spending.
Separating your money in this way makes it easier to organise payments. You can set up direct debits, and you will often get discounts for paying this way. Separate money pots also improve your ordering and monetary discipline.
Your short-term savings money pot.
If you’re saving for new household appliances, significant events, or holidays, it is ideal to establish a short-term savings money pot.
Savings accounts are an excellent place to keep this money as they offer better interest rates. However, some service accounts require you to give notice before withdrawing your money. Therefore, if you think you will need your money at short notice, you should search for a suitable savings account with fewer restrictions.
Your emergency fund money pot.
Some people like to keep their emergency funds as part of their savings money pot. However, it also makes sense to have a separate pot for emergencies.
Your emergency fund money part will cover any unexpected events such as car repairs, household accidents, replacing appliances, and so on. Ideally, this money pot should be sufficient to cover your living expenses should you have no other income. Of course, it will take time to grow your pot to this size, so do not be too concerned if you don’t have it straight away.
Your retirement money pot.
For most people, their retirement money part is their pension, which is a vital aspect of your savings plan. It is now easier than ever to save for your retirement through a workplace pension scheme thanks to auto-enrolment.
If your salary is over £10,000 and you are at least 22, your employer is obliged to enroll you in the company’s workplace pension scheme. You will pay 4% of your gross salary into this scheme, with a further 1% going into it from tax relief on your pension contributions.
Your employer pays at least another 3% of your salary’s value. This contribution from your employer is money that you would not typically receive were it not for the workplace pension scheme. Therefore, it is effectively free money, so opting out of your workplace pension is like refusing a promotion or salary increase.
Another thing that will contribute to your retirement money pot is the State Pension. The maximum State Pension currently sits at £9339.20 per year, or £179.60 a week.
Although it provides an excellent supplement, the state pension is unlikely to sustain your retirement on its own. Therefore, you should have other sources of income in place for when you retire.
Personal pensions are the obvious choice for such an income source. However, not all pension schemes are the same. Pension charges can vary considerably between providers and schemes.
Therefore you should regularly check your pension to ensure that the charges have not risen too steeply and that it is performing as you anticipated. If not, you can take remedial action to resolve the situation.
Conclusion
It is excellent that you have started to save. Hopefully, you can now optimise your savings by understanding the importance of a balanced savings plan.
