So, you are busy working hard to bring home those big pay cheques. But how much of your salary should you be putting away for your future? This blog looks at what busy professionals need to consider when putting money into savings and investments.
It seems that in Britain we play fast and loose with our finances. In 2018, a report revealed that a third of people in the UK had less than £1,500 in the bank. In fact, more than one in seven adults had no savings whatever. Over half of UK adults do not add to their savings on a monthly basis. A key reason people suggested they were not saving is that they had no saving goals and no financial plan or budget for the year.
The key rules of saving
Pay debt off before saving
The interest you pay on credit is much more than the interest you can earn in savings and investments accounts. Therefore, it makes sense to pay off any debt (other than student loans) before you start saving.
Start with a rainy-day fund
As a rule of thumb, you should have six months’ worth of essential spend saved for a rainy day. This means if you lose your job, become unable to work, or have a large unexpected expense, you will be financially ok for a few months. This removes any immediate anxiety.
Add to your savings as soon as you get paid
A common mistake is to wait until the end of the month to see what is left to pay into your savings. This is setting yourself up for failure. It is better to work out how much you can afford to save each month and add it to your savings when you get paid.
This will help you consider the money you save each month as part of your monthly budget. In other words, treat your savings as a necessary expense – like your transport or grocery bills – rather than an optional extra.
Adapt your savings plan to your income/lifestyle
Letting your spending rise automatically with your income is an easy trap to fall into. This is called a Hedonic Treadmill. Each pay rise equals a lifestyle upgrade, and bonuses are blown on expensive stuff. It’s important to ensure that, with each pay rise, you are increasing your savings too. You might also consider putting aside a portion of any bonus.
How to make a savings-and-investment strategy
Saving for a purpose can be exciting, and more motivating than saving for the mere sake of it. It also helps you to create a savings strategy and goals, while identifying where best to save. Some of the best strategies are around personal development and fulfilling your own potential. Here are some simple steps to starting saving:
1. Set some goals
A good place to start is setting some savings-and-investment goals to motivate yourself and provide direction. These could be short or long term. For example, saving for a summer holiday, a new house in five years, or saving for an early retirement. Alternatively, you might set your sights on a return to education or night school to enhance your CV.
Do some research to work out how much money you need to achieve your goals. Also try to develop a timeframe for when you want to realise them. Your financial planner will be able to help you identify how much you will need.
Once you know how much you need and by when, you can divide the sum of money by the number of months you have to save, in order to work out how much you need to save or invest per month.
When you make these plans, however, remember to be realistic. So, draw up your monthly expenditure plan to make sure you have enough money left, after your essential expenses and your normal spending money, to meet your savings goal. Should you find this goal is beyond reach, don’t panic. Try pushing back your deadline to create more flexibility.
4. Decide where to save
Where you decide to keep your savings will depend on how financially secure you are, and on whether your goals are short or long term.
If your time frame is 10+ years, then investing your savings might be the ideal route for you. Investing may outperform a savings account in the long term. Nonetheless, it does carry more risk so is not suitable for short-term savings.
A good way to invest is with a highly diversified investment portfolio with a mix of government bonds and company shares. Alternatively, a stocks-and-shares ISA is an alternative. You can save up to £20,000 a year, tax free.
This is not your best option, however, if you don’t want to risk your capital – or simply can’t afford to do so.
Savings accounts are great for when your savings goal is short term. Finding an account with a good interest rate, which will let you pay in on a monthly basis, will help you to grow your money. At the time of writing, unfortunately, interest rates on savings are at an historic low and can be eroded by inflation.
For more information on rates available, visit the Money Saving Expert.
Cash ISAs vary in length but usually require you to hold your money in them for a set period. It is important to ensure that this is aligned to your savings goal, and that you can regularly add to the fund. The advantage of these ISAs is that £20,000 is tax free each annual tax year.
Pensions also have the advantage of being tax efficient, and offer a sensible option for investments geared towards retirement. For many people, this is a long-term investment. You can’t access your pension fund until age 55 (age 57 from 2028). You get tax relief on your savings as you add them, which is a nice discount. The pension fund grows virtually tax free. And when you take your money out, up to 25% of your pot can also be returned without tax.
f you are an employee there will be an auto-enrolment pension, and your employer adds money on your behalf. If your employer offers a matching contribution scheme (e.g. we pay 4% if you also add 4%) it makes very good sense financially to join in.
5. Set up automatic payments
In order to maintain a steady saving habit and put yourself out of reach of temptation, it’s wise to set up automatic payments from your salary bank account. Try to overcome any patterns of wasteful spending.
For savings’ sake
Not all of us know exactly where we want to be or what we will be using the money for in the future. But this should not stop you saving. An easy way to calculate what you need to save is based on your age at the time. If you are age 30, then invest 15%, and if you are 40, save 20% (in other words, save half your current age).
The key to a good savings strategy is to review it regularly. Your financial planner can help you meet your goals more effectively, and this includes constructing a smart, strategic approach to your savings.
If you would like to speak to a financial planner about saving for your future, please contact us today.