We’re told stashing money into our savings each month is a must. But how much are we supposed to be squirreling away, and why?
According to a study* by the Money Advice Service (MAS) in 2016, two-fifths of the population have less than £100 in savings.
Setting aside something for emergencies is essential if you can afford it, but saving is about more than simply preparing for the worst: it's also about laying the groundwork for your financial future.
This means considering ways we can make our money work as hard as possible for us – allowing us to reach our long-term goals and plan for what lies ahead.
What’s the magic number?
It may seem ambitious to be able to put away 20% of our post-tax income each month, but the truth is it’s a good target. And if you want to know how this could fit in with the rest of your spending, the 50/20/30 ratio has been cited as a good rule of thumb…
50% for essentials: These are your fixed monthly costs, from rent or mortgage repayments to electricity, water rates, gym memberships and even Netflix (all the basics!). You may feel that your essentials total a lot more than 50% of your income, but read on…
20% for your financial future: This could include everything from emergency savings to your pension pot and investments.
30% for flexible spending: Life is short, and while saving is important, so are the things that make you happy in the short-term. Whether it’s clothes, hobbies or wining and dining, setting aside some money for fun stuff each month is important, too.
Three reasons you’re not hitting your 20% goal
There may be many reasons why you won’t hit the 20% target; just try to make sure it’s not any of these…
1 You’re just not organised enough: If your finances are one big cloud of indecision, and you come out in a rash just thinking about them, disorganisation – and not keeping a firm eye on your spending habits – could be at the crux of the issue. Sit down and track your spending in order to take control of your finances.
2 You’re living beyond your means: You might want to consider making some lifestyle changes to improve the quality of your financial future. Whether it’s exchanging some of the meals out with friends for meals in, or keeping an eye out for deals and offers that make your hobbies cheaper, saving isn’t about stopping doing all the things you love, it’s about living (and spending) smarter!
3 You keep procrastinating: If you keep meaning to sort out your finances but you just feel like you don’t have the time to sit down and review your options, then now is the time to take action.
What steps can you take to reach that 20% target?
If you’re in debt then you might want to think about paying it off before you add it to your savings. Leaving debt sitting around could have a higher penalty than the interest you would earn on your savings, meaning it can make sense to pay this off first.
Take stock of your basic monthly expenditure. Are you really making the most of your gym membership? Could you do without your weekly cleaner? An audit of your finances will bring to light any unruly expenses that you might want to stamp out.
Come up with a strategy to help you save: for example, setting up an ISA and arranging a Direct Debit to funnel across a certain amount of money each month could be good first step. Creating targets and perhaps even using a budgeting tool each month could help you save over time, too.
How could you make your savings work harder for you?
Are you putting your savings in all the right places? ISAs, for example, are tax-efficient and could give you a potentially higher return than a typical bank or building society account.
The 2018/19 ISA allowance is £20,000, meaning that you can put anything up to this amount in either a Stocks & Shares ISA, Cash ISA or Innovative Finance ISA or split it across these three account types.
The Zurich Stocks and Shares ISA could be suitable for people who want to generate a potentially higher investment return over the long-term (5 years +), taking into account their risk appetite and their capacity for loss. Remember that with investment comes risk - your investment may go down, and you may not get back the amount you invested. To find out how we can help make your money work harder in the long term, visit our investment pages.
Still think you can’t save?
In 2016 the BBC reported* that roughly one-quarter of adults with household incomes of less than £13,500 a year, have more than £1,000 in savings, with 40% in that bracket managing to save something every single month. Although going back over your budget might give you déjà vu, it could be worth taking another look.
Even for those of us who aren’t fond of percentages, 20% is a good rule of thumb. So, are you ready to start saving more and protecting your financial future?
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The Zurich Stocks and Shares ISA is provided by Sterling ISA Managers Limited, trading as Zurich. Sterling ISA Managers Limited, authorised and regulated by the Financial Conduct Authority. Registered in England and Wales under company number 02395416. Registered Office: The Grange, Bishops Cleeve, Cheltenham, GL52 8XX.