Saving, whether it is to build up an accessible pot of cash in case of an emergency, or planning ahead for your retirement, is often easier said than done. Financial advisers share their advice on how to ensure you have enough money in the future while allowing you enough to enjoy the present.
1. Have a rainy day fund
“You should have at least three months’ worth of expenditure in accessible cash,” says Kirsty Stone, a chartered financial planner and financial adviser at The Private Office, an independent firm with branches in Leeds, London and Bath. Before Stone talks to clients about investing, she asks them what their worst-case scenario is: for most people, this is losing their job or being unable to work. An emergency fund might seem unattainable in the current climate but it is something to work towards, she says. “If we look at the increasing cost of living over the past few years and the lack of earnings going up in line with that, people are really struggling to save at the moment. A big concern for me is they will not have that emergency cash buffer.”
2. Saving anything is better than nothing
Even if you start small, it is better to save something than nothing, says Stone. “If anything, it is the discipline of having that direct debit or standing order going out every month,” she says. Bola Sol, a financial adviser and author of Your Money Life, which is out in August, agrees. She says it is worth saving any loose change you can spare, which can “add up and give you a psychological boost”. Sol recalls being in her late teens and putting away a small amount each month, “and then one day I looked and I was like: ‘Wow!’ A little over time can become a lot.”
Financial adviser, broadcaster and author Emmanuel Asuquo, whose book The Ultimate Guide to Money is aimed at children aged nine and over and is out in September, says: “As a child, I learned that I had to be good with money because I never really had it.” He recommends starting small: “If you can save a percentage of your income, that is great. We talk about trying to start with 10%. But for some people, it will be £10 to £20. Start there and build the habit because the habit is more important than the amount.”
3. Open a regular savings account
“At the moment,” says Stone, “you can earn up to 8% AER (annual equivalent rate) on the top regular savings account (fixed for six months), into which you can put up to £200 a month. Not everyone can afford £200, but the minimum you put in is £1 a month. So it’s a good way to get started, getting that secure buffer in place.”
4. Shop around for the best interest rates
Asuquo uses three sites to compare rates: money.co.uk, Money Saving Expert and Money Supermarket. “The reason I say go to all three is that sometimes they have deals or partners they recommend.”
“Go to an independent ‘whole of market’ cash advice website,” says Stone. The Private Office’s sister company Savings Champion is one such site. “It is really easy to find the best savings accounts, including the best fixed rates, easy access etc. Most people can get a good rate without too much admin, so you can simply open those accounts yourself, but it may be wise to consider a cash savings platform.” This is an efficient way to keep your cash protected and it’s easy to keep track of all your accounts, says Stone.
5. Move money when rates end
As soon as the deal expires or term ends, move your money, says Stone. When you sign up for a savings account, says Asuquo, put a note in your calendar for 12 months’ time to remember to move it. “Don’t make a mental note. Use the technology that is available to help,” he says.
6. It is probably safer in a bank than under your bed
When signing up for any account, it should be covered by the Financial Services Compensation Scheme, which protects £85,000 per person per bank or building society, but it is worth checking that this is the case, says Asuquo. “There are some companies that you might not have heard of before, such as mortgage lenders, but they typically tend to have the same protection.”
7. Use or lose your Isa allowance
Everyone has a personal savings allowance (PSA) – the total amount of interest you can earn each year on which you don’t pay tax – which is £1,000 for a basic rate taxpayer and £500 for a higher-rate taxpayer, but interest on money you put in an Isa is not taxed, says Stone. You can currently put £20,000 into an Isa in any financial year, but, she says: “It is a use it or lose it allowance, so you can’t go: ‘Oh, I didn’t do it last year, so I’m going to have an extra £20,000 available.’” With interest rates having risen so much in recent years, many savers will now breach the PSA and therefore be liable to pay tax on savings outside an Isa. So although, as Stone points out, Isa rates are now a bit lower than other options, the tax-free return on an Isa is likely to be better than the after-tax rate on a non Isa account.” For example, she says, the top one-year fixed rate bond at the time of writing is paying 5.25% but after the deduction of basic rate tax that falls to a return of 4.20% net. The top one-year cash Isa, on the other hand, is paying 4.94% tax free.
8. Maximise your pension
“Pay into your pension,” says Sol. “It is one of the best tax-free investments, and it is essential for long-term financial security. I always tell people, think about the days when you feel tired going to work and then think about 30 years’ time when you’re going to be even more tired. Of course, you need to have a balance – you want to contribute to your pension now and still have savings for more immediate goals and emergencies. Everyone just needs to do what they can to ensure there is enough in their pension as they get closer to the age at which they want to retire, as opposed to realising too late and having to work an extra 10 years.”
“If you are a basic rate taxpayer, for every £80 you put into a pension, the government gives you £20 – for a higher rate taxpayer, the relief is even greater through your tax return,” says Stone. “The negative to a pension is you are tying money up,” she says. “It’s not available for emergency money; it’s in your pension until you’re 55 or 57, depending on when you were born and the type of pension you have. So the tax efficiency is fantastic, but you’re locking it away.” She advises looking at whether employers will match contributions, and says it is the ideal place to start thinking about investments with a slightly greater level of risk. “Because your pension is such a long-term investment, fluctuations shouldn’t emotionally impact people as much, because you can’t touch it for 20 to 30 years anyway. Log into your pension provider’s website and watch what is going on. You can even choose the investments yourself, for example if you’d prefer to be more socially responsible or environmental, to align with your beliefs.”
9. Don’t be afraid of the stock market
“You hear people talking about their investments, and they talk about things such as cryptocurrency and investing in individual shares or companies,” says Stone. “For the vast majority of people, there is just no need to expose yourself to that level of risk or stress.” Instead, she says: “Go to an online provider, such as AJ Bell, Vanguard or Investment Champion. These institutions make it easy for you to set up an account and put £100 a month into an Isa, or whatever it may be. They may even have ready-made investment portfolios for people, appropriate to the level of risk they are happy to take.”
Asuquo says: “You don’t have to put in all your life savings. You can use apps such as MoneyBlock, Nutmeg and Revolut. They will automate your spending, so as you spend, the app will round it up to the nearest pound. Let’s say you were spending 60p, it would put 40p in the market. All those little roundups add up over time. That’s a great way to get started. I’m not saying we’re going to get rich doing that, but sometimes experience is the best teacher. Even if it’s a small amount, if it’s gone up 10% or gone down you can see that. As you start to experience it and it starts to make sense, you can then increase it.
“Tracker funds are a great place to start, because they are easy to understand,” Asuquo adds. “If the market goes up, your money will go up, if the market goes down, your money will go down. But if you keep saving on a regular basis, you’ll see the benefits over the long term. The main thing is to have a five-year mindset: you only want to put money in there that you can afford not to touch for five years.”
10. Consider ethical investments
Getting into the stock market is relatively easy, says Mike Head, director at financial advice firm Ethical Investors, but “avoiding doing things that you don’t want to do is where it becomes more difficult”. He says a new labelling regime has been introduced in the UK and will be compulsory from December. “It will effectively mean that if you want to describe your fund as being sustainable or having an impact, you are going to have to prove it.” If you are a DIY investor, it is quite obvious whether or not some companies are ethical. For others, you can look at their holdings, says Head.
11. Work out the level of risk you feel comfortable with
This depends on your circumstances, says Sol. “Where are you in life? How long can you keep your money invested before you need it? What are your financial goals? Are you planning to buy your first home? Are you close to retirement? Different goals require different levels of risk, and then you have to think about how comfortable you are with volatility. If your investment value dropped by a certain percentage, what would be your emotional response to market fluctuations?”
12. Regularly audit your bank accounts
“Don’t just wait for your bank to send you a text message saying you’re overdrawn,” says Stone, take a bit of time each month to check your accounts and see what is going on. “It doesn’t have to be too painful, but it is really important for your overall financial health to be doing that. It is about having an awareness of what you are spending and where it’s going, because then you’ll recognise a pattern of things that are costing you more money than perhaps you need to be spending.”
13. Be clear about your financial goals
“Ask yourself where you see yourself in one, five and 10 years,” says Sol. “It is important to set specific goals when it comes to money. ‘I don’t know’ cannot be an answer. It is better to set a goal and then to reach a decent level than just continuously not having a ‘why’ for your savings.” And celebrate small wins, she says. “Acknowledge and reward yourself for hitting saving milestones. It’s a great way to stay motivated, even if it’s just a cheeky pizza. Commemorate that moment to give yourself an extra buzz to go again.”
14. Prioritise paying off high-interest debts
“It is generally a good idea to focus on paying off high-interest debt, for example, credit card debt, before you prioritise savings,” says Sol. “High-interest debts can accumulate quickly and cost more in the long run. However, while tackling your debts, always have a small emergency fund to cover unexpected expenses.”
Stone says: “In the same way that you shop around for savings accounts, shopping around to make your debt less expensive is essential. Looking at the zero balance transfers and lower rates that are available on that debt is really important because it is a liability that is costing you money by being there. It can also impact on getting mortgages or cheaper borrowing in the future, because it is included in your credit score. So have a plan in place for when you can realistically clear this debt and commit to that as much as you can. Making regular payments to pay off debt could have a positive impact on your credit score, rather than making ad-hoc payments.”
15. Know that it doesn’t pay to be loyal
“Shopping around for utility bills is crucial,” says Stone. “Food is really expensive,” adds Asuquo. “We can be loyal to the supermarket that is closest to us, but that might not be in our best interest.” Looking at comparison sites and travelling a bit further can help you to reduce costs and save more, he says. His other money-saving tips include taking food to work for lunch, cancelling a subscription, and getting together with friends at home rather than meeting out.
16. Premium bonds aren’t what they used to be
“Premium bonds used to be very good back in the day,” says Asuquo. “They’ve made a lot of changes in regards to how much they pay out, and it’s not as exciting now, especially with interest rates being where they are at the moment. If you’ve already filled up your Isa and looked at savings accounts, then maybe go for Premium bonds as a third option.”
17. Find someone to hold you accountable
Be organised about where your money is, says Asuquo. “Have different accounts for different goals, so all your money isn’t just in one. And have an accountability partner. You’re much more likely to achieve your goal if you’ve got a friend or someone holding you accountable.”
18. Think about what you can realistically cut
“I used to think it was silly stopping buying coffees, but then I did it and I’ve saved quite a bit,” says Sol. “In terms of cutting back, we all know that times are really hard and there’s only so much you can cut in this climate. But for a lot of people, your money is going in the places you don’t track. It is going to the shops and buying something that wasn’t in the budget. It is the random dinner with friends. It is the person who’s called you because they’ve decided at the last minute to celebrate their birthday. That is where your additional money is going. We have become a spending culture through and through. If we can’t keep track of where that additional money is going, it’s just going to keep disappearing. So start tracking it, and that’s where your missing savings are.”
• This article was amended on 25 July 2024 to remove a quote that incorrectly expressed a percentage.
