You might think I’ll say that the best way to save is by not spending. Not necessarily. We all have to live and life can be expensive. But saving on a regular basis is the best way to build up a solid chunk of money. Doing it through an automated system like direct debit or standing order is the most effective way to build up savings without really having to think about it day to day. But someone saving to buy a car may use a completely different method of saving to someone saving to but a house or someone saving for retirement. There are however some common rules to adhere to if you want to save effectively.
1: Have a goal: Saving isn’t always easy especially if you are the kind of person who is constantly juggling your income and outgoings. Saving for something specific is always more effective than simply saving for the sake of it. Having a specific goal will also keep you motivated.
2: Work out your budget: Are you actually in a position to save? You won’t know unless you work out your budget. Simply put, this is your income vs your expenditure. Find out how much you have left every month after all your expenses are paid. Some of this money may be used to save.
3: Get rid of your debts: Apart from your mortgage which is easier said than done to get rid of, getting rid of any credit cards or loans makes sense before you start. This is because the debit interest you pay on debts is almost always higher than any credit interest you’ll receive in a savings account. Once debt free, you can start saving.
4: Rainy day money: Start by building and setting aside an amount of money for a rainy day such as time off work due to illness or an emergency fund for mishaps. As a minimum, we would recommend 3 to 6 month’s net salary to be kept somewhere easily accessible.
5: Short term savings: Decide how much you are likely to spend on things like a car or a holiday in a given year. Divide that figure by 12 to give yourself a monthly amount to save. This should be invested in a relatively easily accessible account. If you keep this up, in 12 months’ time, as if by magic, you’ll have enough money to pay for whatever you need.
6: Medium term savings: Medium term savings would include things like saving for a house deposit or saving for a wedding. It’s quite simple to set an amount to save monthly. Let’s say your goal is £15,000 in five years’ time. Just divide that figure by 5 years then divide that by 12. £250 per month. That’s how much you’ll need to save on a monthly basis. For a potentially better return than cash accounts, consider a stocks and shares ISA; which, remember, carries a degree of investment risk.
7: Long term savings: Whilst the most obvious long-term goal would be saving for retirement less obvious goals cross such as a much larger house deposit could be considered long term. Nonetheless, the most effective way to save long term if you want a good return is via stocks and shares through a workplace or personal pension or a lifetime ISA. For best results for medium and long term, speak to your independent financial adviser, who should be able to help you assess risk and find a savings vehicle that suits you.