Nothing reminds you of how pitiful your savings account is like January. The early pay day in December isn't the only thing to blame, you only have to look at how much you splashed out over Christmas to feel that wave of money guilt wash over you. We set resolutions to travel more, to move into our own home, to better our work life balance, then January roles around and our bank statements have us writing off our resolutions within the first two weeks of the year.
Alas, with pay day still weeks away now is the perfect time to sit down and think about how exactly we're spending, or more importantly saving, our money. That's why we spoke to Andrew Johnson, advice manager at the Money Advice Service to find out exactly what we should be asking ourselves if we want to save more money...
1. How much can I afford to save?
‘If you’ve got money left over at the end of each week or month then great, y you’ve already got your starting point’ says Andrew, ‘But even if there’s usually nothing left, it doesn’t mean you can’t save. The first step to taking control of your finances is doing a budget. It will take a little effort, but it’s a great way to get a quick snapshot of the money you have coming in and going out.
‘If you’re spending more than you have coming in, you need to work out where you can cut back. This could be as easy as making your lunch at home, or cancelling a gym membership you don’t use,’ he continued, ‘You could also keep a spending diary and keep a note of everything you buy in a month. Or, if you do most of your spending with a bank card, look at last month’s bank statement and work out where your money is going.’
2. Should I set a savings goal?
‘People who set a money savings goal save faster than those who don’t,’ says Andrew, ‘Step one is to name your goal. Then work out how much you need to save each month depending on the price of your goal, how much spare cash you have at the end of each month, and how soon you want to reach your goal. It’s a balance between what you can afford and how long you want to save for.
‘Step three is to set up a standing order, open a straightforward instant access savings account,’ he continued, ‘It might be easiest to do this with your own bank but make sure to shop around to find the best place for your savings. Comparison websites are a good starting point for anyone trying to find a savings account tailored to their needs. They won’t all give you the same results, so make sure you use more than one site before making a decision.’
3. How tax efficient are my savings?
‘Make sure you don’t pay more tax than you need to,’ says Andrew, ‘make the most of tax-free savings and investments for you and your children or grandchildren. ISAs (sometimes called NISAs) are tax-efficient savings and investment accounts. You can use them to save cash or invest in stocks and shares.
‘You can pay your whole allowance of £20,000 into a Stocks and shares ISA, or into a Cash ISA or any combination of these,’ he continued, ‘you pay no Income Tax on the interest or dividends you receive from an ISA and any profits from investments are free of Capital Gains Tax.’
4. Should I set up savings accounts for my children?
‘Junior ISAs are a great way to save tax-efficiently for your children,’ says Andrew, ‘Family and friends can put up to £4,260 into the account on behalf of the child in the 2018-19 tax year. There’s no Income Tax or Capital Gains Tax to pay on the interest or investment gains. Junior ISAs are available to any child under 18 living in the UK who doesn’t qualify for a Child Trust Fund.’
5. Should I be investing my money, instead of saving it?
‘This depends on your goals and your financial situation,’ says Andrew, ‘some kinds of savings and investments are very safe with very little or no risk you will lose money but your money often grows more slowly. For example, savings in a bank account. Other kinds of investments are higher risk. They may grow your money faster but only if the investment works out. Just remember you could also lose money if it doesn’t. And you don’t know for sure how it will turn out.’
6. How much should I have in emergency savings?
‘Everyone needs to prepare for sudden expenses – for example, a broken washing machine or boiler – but there’s such a thing as too much emergency cash,’ says Andrew, ‘It’s best to split your savings, keep some to hand for emergencies and put the rest where it can work harder for you. You want to get your emergency fund set up as soon as possible, but like with all savings, it’s best to keep to what you can afford and make sure to save regularly. Ideally you should aim to have three months’ money in reserve as part of your savings.’
7. Should I be saving when I have debts and loans to pay off?
‘You will rarely be able to earn more on your savings, than you’ll pay on your borrowing,’ says Andrew, ‘So, as a rule of thumb plan to pay off your debts before you start to save. When you are paying more for your borrowing than you’re getting on your savings, it makes sense to pay off your loans so long as you can access funds in an emergency. Once you’ve cleared your debts you’re freed up to save more and faster. If you have several debts to clear, aim to clear the most expensive ones or those secured on your property first.’
8. How should I be savings towards retirement?
‘Retirement can last for 30 years or more depending on when you retire and how long you live,’ says Andrew, ‘Your income in retirement is likely to come from several sources including your State Pension, any other pensions you’ve built up while working and any savings and investments you have. Before you give up work you need to make sure these will provide you with enough money to live on for the whole of your retirement. A pension is basically a long-term savings plan with tax relief. Your regular contributions are invested so that they grow throughout your career and then provide you with an income in retirement.’
9. I want to buy my first property, what help can I get to save for a deposit?
‘Your deposit is by far the biggest thing you'll be saving towards,’ says Andrew, ‘You will usually need to cover at least 5% of the cost of the property, with a mortgage to cover the rest. Help to Buy ISAs are a new type of ISA designed to help first-time buyers save up a deposit for their home. The government will add 25% to your savings, up to a maximum of £3,000 on savings of £12,000. Alternatively, you can put a maximum of £4,000 into a Lifetime ISA each tax year. You are paid a 25% bonus from the government. The bonus will be paid in monthly and the maximum bonus you can earn in a tax year is £1,000.’
10. What kind of return should I expect on my savings?
Savings in a bank account are very safe, with very little or no risk you will lose money,' says Andrew, 'but that means your money often grows more slowly. Investments may grow your money faster - but only if they work out.'
You can compare the best savings accounts here.
For free and impartial financial advice, visit the Money Advice Service here.