Working towards your savings goals can sometimes feel a little overwhelming, by taking some simple steps you can feel in control of your savings and get on track to meeting your goals. We’ve put some tips together to help you on your way.
1. Consider paying off debt first
Saving money is important but not at the expense of paying off debt. In many cases, it makes sense to pay off debt before you start saving or use savings to clear your debt. This is because the interest rate you pay on debt is often much higher than the interest rate you get on savings. So, debt costs you more than saving makes you.
Here’s an example:
If you had a balance of £1,500 on your credit card, and were paying the average rate of 21.6%, you’d pay interest of £324. If you also had £1,500 in savings, the bank may pay you 1%, which is £15 in interest. If you used your savings to pay your credit card off, you’d be better off by £309.
You can apply the same principle to your mortgage. If you have cash to spare, overpaying can save you money in the long run. Mortgage companies often charge for overpayments or only let you pay up to a certain amount each year, so you’d need to consider that.
2. Then focus on cash
Cash savings are the first thing you should focus on if you want to grow your money. Whatever you don’t need each month can be saved, along with any windfalls you receive – like cashback from being a savvy shopper, cash gifts or an inheritance. You should aim to save in a way that pays you the best return but also gives you access to your money when you need it.
3. Grow your contingency fund
Successful saving means building different cash pots of different sizes to do different things. The first thing to think about is a contingency fund so you are covered for unexpected financial events.
You could start by saving £1,000 and grow it from there. It might be useful to keep it in a savings account attached to your main current account. This is unlikely to pay the most interest, but it means you’ll be able to shift money quickly and easily between accounts as you need to.
Once that pot is up and running, you should aim to build a larger pot for larger unexpected costs and one-off spending.
4. Find the best home for your savings
It’s important to get the best rate of interest that you can. Savings accounts will usually pay higher interest if you are willing to tie your money up for longer periods.
Savings bonds are accounts where you can only get at your cash after one, two, three or five years. If being able to get at your money any time is important, look for an easy access account.
You may find that the very best rates come not from specialist savings accounts, but from current accounts. These may suit you but will come with conditions, such as paying in your salary every month and paying bills via direct debit.
5. Get started on retirement savings
When it comes to saving for retirement, the earlier you start contributing, the more time your money will have to grow. This is a way of supercharging your savings using the power of compounding. Put simply, it means you benefit from investment growth that has already built up on your savings. This will accumulate over time and can turn a small pot into a significant amount.
We’ve put together some rules of thumb to help you set some retirement savings goals, we suggest saving at least 13% of your annual income, before tax, each year.
The good news is that this 13% includes any contributions your employer makes to your workplace pension.
Your recommended yearly savings rate will depend on a variety of things, including when you plan to retire, your lifestyle in retirement, your age when you started saving and how much you’ve already saved.
Find out how much you should be saving for retirement with our retirement savings guidelines.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision, nor should it be treated as a recommendation for any investment or action. You should regularly review your investment objectives and choices and if you are unsure whether an investment is suitable for you, you should contact an authorised financial adviser.