How to Start Saving Money
If you’re new to saving, or just new to saving seriously, here’s how to build the habit.
The COVID-19 crisis has shown exactly how essential it is to have savings. In tough and uncertain times, a rainy-day fund to fall back on offers calm and security.
But fears of the worst are not the only reason to build yourself a financial cushion. Having savings means having choices. Money in the bank brings the freedom to leave a bad job or relationship, to take a holiday, buy a first home or start a family.
Whatever your age or stage in your career, you can start taking steps toward the life you want.
Hang on, aren’t savings rates low right now?
Yes, we are currently in a prolonged and persistent period of ultra-low interest rates. Returns on savings are pitiful, and that can feel like a reason to avoid putting money aside.
However, saving isn’t just about watching it grow. It’s also about having a financial safety net to support you when you need it. And it's a way to avoid expensive credit. If you can build a good habit now, you won’t have to dip into an overdraft or use a credit card to manage unexpected bills and expenses.
Having said that, there’s a big difference between the market-leading rates and the standard rates, so make sure you compare savings accounts to find the best deal for you.
Okay, fine, how do I start saving?
If you’ve never had a saving habit, it can be too easy to put it off. And rules of thumb about aiming to have three to six months' worth of salary saved up can be daunting. But don't give in to either: You can start small.
First, draw up a budget so you know how much of your money goes to bills and other essentials each pay period. Next, decide how much you can save out of what’s left, while leaving a realistic amount of money for any day-to-day costs.
Once you have a figure for how much you'll save, sweep that money out of your current account and into a separate savings account on the day you get paid. If you arrange for the transfer to be made automatically, you don't have to remember it, and you'll quickly get used to getting by without it.
Should I clear my debts first?
The interest you will earn on any savings will be far outstripped by the interest that you pay on debts. Because of that, it’s usually a good idea to prioritise paying down debt.
That said, it’s likely sensible to put some amount into an emergency fund — even if just a few hundred pounds — no matter whether you have existing debts. Every pound you save is one you won't have to borrow if some small but urgent need arises.
What kind of savings account should I get?
It can be tempting to simply open an account at whichever bank you use for your day-to-day finances. However, there’s a wide range of accounts on offer, and rates vary as well, so it’s a good idea to compare the whole market and pick the best fit for you.
- You’ll first want to choose between a cash ISA and a standard savings account. Don’t forget that if you’re saving for a first home or for retirement, then a Lifetime ISA will pay out a 25% government bonus, which is worth considering.
- Whether you choose a tax-free ISA or a more typical savings account, you’ll need to choose what style of savings you prefer. There are easy access accounts that typically pay less interest but allow you to withdraw cash at any point.
- Alternatively, there are more restrictive accounts, such as fixed-rate deals where you get a higher interest rate but face penalties if you withdraw your money before the end of the term.
- Some newbie savers may like a regular saver account. Here you commit to paying in a certain amount each month, again usually in exchange for a higher interest rate. If you don’t make a transfer each month you likely will lose the top rate.
The right account for you will depend on what you’re saving for and whether it’s for the longer- term or a fixed goal. One thing to note: an emergency fund should be in an account where you can instantly access your money when you need it.
How can I keep my savings habit going?
As with any good habit, it can be a challenge to keep saving. Once you’ve achieved a decent sum in an account, you may lose motivation.
That’s when you need to consider why you are saving beyond just an emergency fund. Are you planning a holiday? A wedding? Do you want to save up some money to invest?
No good fitness or gym trainer at your first session will just tell you to start doing press-ups — they'll ask, ‘Why are you here?’ And it’s the same with saving — think about why you’re doing it.
Being clear about your goals, and having some longer-term ones, can be what keeps you motivated.
Can I get any savings help?
The government offers quite a lot of help to get people saving more. With an ISA you can save or invest without paying tax, and with a Lifetime ISA you can earn up to £1000 a year through a government bonus as long as you spend it on a first home or in retirement.
For non-ISA savings, there’s the personal savings allowance, which means the vast majority of people don’t pay any interest on what they squirrel away.
And if you’re entitled to the Working Tax Credit or you’re receiving Universal Credit you may be entitled to support from the Help to Save scheme. This is a type of savings account where you can save up to £50 a month and receive a government-paid bonus of 50p for every £1 you put away. Unlike regular saver accounts you don’t need to make a payment every month.
The bonuses are paid at the end of the second year and then the fourth year of saving, and it will close four years from the date it’s opened. Once it’s closed you are not allowed to open another, even if you didn’t make full use of it and even if you closed your first account early.
Is a savings account or an ISA right for me?
This depends on your personal circumstances. Most people will not pay tax on any cash savings because of the personal savings allowance.
However, that is an allowance that could change, whereas it’s less likely the tax-free status of an ISA will be removed from existing savings. So for longer-term savings, especially if you could make use of the Lifetime ISA, an ISA account may be best.
Having said that, some standard savings accounts offer better rates than ISAs. If you just want to chase the highest interest rates, you may decide to pick a standard account. Make sure you compare rates to find the best one for you.
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Felicity is a personal finance journalist. She regularly writes for The Times, The Mirror and The Independent. She has won five awards for her work, including Household Money Journalist of the year. Read more