Saving money in the UK's current low-interest environment may not seem appealing but there are more reasons to save other than earning good returns.
Creating a savings cushion is an important part of your overall financial strategy because it helps you cope with unexpected bills or unplanned expenses.
What are we saving?
Research from Aldermore Bank reveals what we are saving across the UK. It found that East Midlands and Wales are the only regions to increase their savings ratio over the last year, both by 9%.
People from the West Midlands save the least, just £1,333 or 6% of pre-tax income, just below the national average of 7%. While Londoners have reduced their savings ratio by the greatest amount even though they are the highest earners, down to 7% of pre-tax income compared to 10% in 2017 when they were joint top of the table.
How much should we save?
Financial experts offer different advice on this point, and whatever the amount, it can seem daunting and out of reach at times.
Having two, preferably three months' salary is generally seen as the right amount to have as a back-up in case you lose your job. This should provide enough money to pay your bills until you find another job and get back to earning what you're used to.
The key is to save when times are good. This is particularly true if you're not on a fixed income, if you're self-employed or some of your income comes from bonuses.
If you're on a fixed income, saving a regular amount each time you're paid is a realistic option. Aim for 10%.
Some experts advocate the 50/30/20 rule, where 50% covers essentials like food, rent and household bills, 30% for discretionary spending, leaving 20% for savings.
However, this doesn't take into account the cost of living in different parts of the country or your particular circumstances.
Rent in London could be 50% of your income and if you have a young family outgoings will dictate that you can't save much.
Then again, if you are living at home trying to save a deposit for a flat, hopefully, you can save a higher proportion or if you are in your 40s and 50s, at the peak of your career earnings you can save more.
The truth is, you cut your cloth according to your current situation, savings goals, future needs and earning power, but having that two-month minimum back-up is a good aim.
The psychology of saving
You can increase your ability to save by employing psychology. You do this by saving money that you pretend you've never received.
By doing this you bypass the reason that most attempts to save money fail – because you know that you can access the money and therefore you give in to spending urges.
Instead, put money somewhere you can't get at like a fixed savings bond that doesn't allow withdrawals or give it to a relative and make them promise not to tell you how you can access it.
Best options for different types of savings
If you need regular access to your savings, then you choose a regular saver account or one that allows penalty-free withdrawals. These typically pay lower rates of interest.
If you have a long-term savings goal that could take two, three or more years, think about opting for a savings bond for the duration of your savings goal. They pay higher interest and more for the longer you save.
Long-term savings such as for retirement are usually linked to stock-market investments. In the current savings and investment environment, they're more likely to give you a higher return but you can make losses. Invest in a way that matches your appetite for risk and get financial advice if you're unsure.
Tips on creating a savings budget
First of all you need to set a savings goal, realistically research how much your goal will cost and how long you have to reach it. Then;
- Set a target amount
- Work out how much you can save each month
- Decide on your timeframe: short, medium or long-term
- Find the right account for your timeframe
- Shop around to find the best rate for the type of account you've chosen
- Set up a standing order
- Review your goal and regularly track your position
- Be disciplined and stick to your guns until you reach your goal.