The events of the last few months have served as a stark reminder to many of us of the need to be prepared. Whether you’re just starting out or looking to streamline the way you save, we’ve put together a quick guide to ensure you get the most from your money.
Good Debt vs Bad Debt
The first step to saving may seem obvious, but it’s the foundation for any sensible plan: analyse your outgoings to ensure you’re in a stable position to begin saving. You need to be on an even keel before setting aside extra money, so it’s best to begin taking action to rectify any outstanding debts or credit cards – especially if you’re paying high interest rates. You’ll have no doubt heard the phrase ‘Good Debt and Bad Debt’ and its important because not all debt is the same. Mortgages for example are good, without them the vast majority of us would never own our own homes, but anything with a high interest rate, such as PayDay loans can get very expensive very quickly and should always be paid off as soon as possible. Once you’re ready to start saving or have reduced any debts to a negligible or manageable sum, it’s time to look at setting realistic targets.
Rainy Day Money
The first thing to think about is what our grandparents would have called your ‘rainy day money’ or in other words, an emergency fund. A sensible amount is anywhere between 1-3 months’ salary and although it might sound like a lot, this is your safety net for anything from your washing machine breaking to losing your job. The most important thing is that you have it readily available, so a normal cash account or instant access savings account is a good option here.
What are you Saving For?
Are you saving for a holiday, a house, or for your future? The amount you intend to save and the period in which you need to save it will determine the severity of any cutbacks you need to make, and the best place for that money which we’ll touch on later. Short-term goals may require more drastic action, whereas saving for your retirement could be as simple as making a smart monthly investment over a prolonged period. Either way it’s important to set a target, then take a microscopic approach to your outgoings to determine the realistic time frame needed to reach it.
Necessary vs Unnecessary Spending
Whether you prefer to stick to a pen and paper or live in an excel sheet, go through your monthly statements, receipts and bills and divide them into the ‘necessary’ or ‘needs’ and the ‘unnecessary’ or ‘wants’. The trick here is to be honest with yourself. It’s not about forcing yourself to say no to every flat white in the morning, but is another pair of trainers absolutely necessary? It’s a great exercise to get a genuine picture of your total spending.
If tackling this manually fills you with dread, most banks now offer a service via online banking or via their apps allowing you to see a breakdown of your spending already set into categories, visualised in a chart or colour-coded, whilst the most sophisticated will even help you identify unnecessary spending. Apps like Yolt allow you track your spending across lots of different accounts, and Monzo (which if you haven’t heard of, where have you been?) has some brilliant budgeting tools already built in, letting you clearly identify where you’re overspending. Silos ‘Savings Rules’ allow you to create rules based on your personal spending habits, so if you really have trouble curbing your Amazon spending, why not get Silo to automatically save 10% of anything you do spend?
The 50-30-20 rule
A simple structure to follow is the 50-30-20 rule originally coined by Elizabeth Warren (the Democratic US Presidential candidate) and her daughter (and businesswomen in her own right) Amelia Warren Tyagi. The rule dictates that around 50% of your after-tax earnings should go towards ‘needs’ (these are your ‘necessary’ spends from earlier) and 30% to ‘wants’ (your ‘unnecessary’ pile), leaving you 20% to contribute to your savings. ‘Needs’ should include the things you’d expect, like rent or mortgage payments, utilities, insurance, transport, food, credit card bills and similar non-negotiable payments. Your ‘wants’ are self-explanatory: these are the things you spend money on which you could go without.
That final 20% is your savings target, it sounds like a lot, but it’s a great target to have in mind when looking at it in relation to your overall earnings. If too much is coming under ‘wants’, look at changing energy suppliers, digitising subscriptions, and cancelling unnecessary direct debits. A study by Sky Mobile a few years ago found on average Brits were paying £40 a month via direct debit for things we never used, or had totally forgotten about. So see if there’s anything you’re paying for that you don’t use, and consider saving it instead.
Cash is King, Right?
Once you’ve worked out what you can comfortably afford to save monthly and have made sure it’s possible, it’s important to choose the right account to save it in. Standard savings accounts with your bank may not yield as much interest as say an ISA (Individual Savings Account), but they are excellent choices for things like your ‘emergency fund’ because as the name suggests, it’s money you want instant access to. If you haven’t yet got an ISA, that should be the next thing on your list. Each individual in the UK has the right to save up to £20,000 tax free in an ISA each tax year. There are Cash ISAs and Stocks & Shares ISAs and you can split your tax-free savings allowance across both, as long as the total amount you save does not exceed your total allowance. Keep an eye out for offers on Cash ISAs with high interest rates, because typically they’re pretty low rates of interest.
When it comes to longer term savings, that’s anything you won’t need for 5 years or more, to make your money work even harder for you consider a managed Stocks & Shares ISA and allow an expert to invest your annual allowance in global markets. Your money is invested into the stock market so its value can go down as well as up, but with Silo for example, we choose your investments based on how comfortable you are with these risks.
Regardless of whether you’re just starting out or want it is you’re saving for, we hope these tips get you on the right track to reaching your savings goals. Remember to be honest with yourself about your spending, set yourself realistic goals and most importantly, make (and stick to) a plan. Future you will thank you.
Please note this article is for information purposes only and should not be considered advice.