For many of us, the last few months have been a wake-up call when it comes to our finances. We know we should have savings, but how much should you have and how do you get started? Our Real Life Money correspondent, Laura Whateley, explains
The pandemic has made us reassess many aspects of our lives, not least how we spend our money, and how important it is to put some of it aside for the unexpected. After all, who saw the financial pressures of 2020 coming?
Of course, we have long been told to create an emergency savings pot for a rainy day, but this year has brought into sharp focus why that is such a smart idea.
Without money to fall back on, if you lose your job, face a sudden reduction in earnings (perhaps because you have been furloughed or are having to home school children) or an unavoidable large expense, you will have to turn to credit cards or loans that, if you are unable to repay them regularly, can quickly lead you into a sticky debt situation.
Nearly one in three Brits were unprepared for the lockdown, money-wise, according to research by Zopa, with a fifth saying the Coronavirus has been a wakeup call for managing finances. Millennials in particular – 50 per cent of those surveyed – are determined to start saving now.
But, how do you get into the best savings habit? Here’s what to consider:
How much do you need in an emergency fund?
The traditional rule of thumb from financial advisers is that you should set aside three to six months of essential outgoings (think rent or mortgage, bills, food shopping) in case you lose your job, have a leaky roof that needs repairing or a dodgy washing machine that needs replacing.
This is a helpful guide, but remember it uses a ‘one size fits all’ approach, and you should also consider carefully your own circumstances and how many months of outgoings would constitute enough savings for you.
What to consider
What would happen if you lost your job? How long could you make do? Have you got other people, such as a spouse or children, reliant on your income, too? If you couldn’t pay your rent or mortgage, could you downsize quickly, or live elsewhere while you get back on your feet, or would you be stuck?
If you are self-employed, you might feel you want to shore yourself up more given the more precarious nature of freelance earnings.
How much and how quickly can you save?
You might decide that you need a year’s worth of emergency savings, but can you afford to put aside that much? Often we are too ambitious when it comes to saving, setting a high ideal target and then feeling despondent if we don’t reach it quick enough, leading to us giving up before we’ve started. It helps to make sure you add savings into your overall spending budget.
Sit down and work out how much money is coming in each week or month, and then how high your unavoidable outgoings are, for example, cost of housing, essential bills, childcare, transport, and basic food shops.
The difference between the two – whatever is left, and hopefully there is plenty – is the sum of money from which you can budget for everything else, including savings.
How big a proportion of this you want to move into savings depends on your spending habits and priorities. Decide how much you can afford to set aside and transfer it, as soon as you are paid, into a separate savings account to keep clear boundaries between money you’re “allowed” to spend and money you are supposed to be accessing only in an emergency.
Don’t forget the long-term
When working out how much you want to save don’t just think about the short term. You need savings in cash for emergencies, but you should also factor in how much you might need to save for retirement, as well as any more mid-term goals such as buying a house, or saving for children, a new kitchen or a big holiday.
Where to put your savings
Emergency savings need to be to hand. Look for an easy-access account, a regular saver, which may have better interest rates, or a current account that pays interest.
For medium-term savings hunt for better rates. Usually you are rewarded for locking money away for longer. You might want to put money away in a fixed-term savings account, for example, or if you are saving for your first property, and are under 40 years old, you could consider a Lifetime ISA.
When it comes to much longer-term savings you may have a pension through work, or if you are self-employed, you could set one up yourself along with a direct debit to regularly top it up. Or you could consider investing in stocks and shares (as long as you are prepared to leave your money alone for several years to ride out the ups and downs of the market).
Don’t ignore debts or direct debits
Make it easier to reach your savings target by assessing some of your regular outgoings, too, and whether you could trim them back. For many of us, the pandemic and lockdown has been an opportunity to review our more mindless spending, and think about what we most miss and value, and what we could probably live without. This was the case for Dawn Heels, a money blogger who told us her Real Money Story. [LINK]
Have a look through all your subscriptions and direct debits. Are there regular payments that you’d forgotten about that you could get rid of? If you have a loan or credit card to pay back, focus on that before piling too much into cash savings. The rates on loan products are much higher than you will receive on your savings, so if you are clearing only the bare minimum of your debts, you will be wasting a lot of cash.
If you really struggle to save, you could try and gamify the process with an app. There are apps that let you save a few pennies or pounds each day or week, that round up your spending, or that analyse your current account to see how much you could afford to put aside, moving money automatically into a separate pot.
Even if you can only afford to set aside a few pounds a month, the act of starting saving will help you feel more on top of your finances, and get you used to the feeling. Set a plan in place, pay yourself first, then forget about it, and you might be surprised how quickly your money grows.
Laura Whateley is a freelance writer and author of Sunday Times bestselling book Money: a user’s guide. She has written for a wide variety of publications including The Times, The Guardian, Grazia, Refinery 29, Elle and Stylist Magazine. All views are her own.