The importance of a balanced savings plan

From current and savings accounts to ISAs and pensions, there are plenty of ways to put money away. And great news if you are already saving. One of the keys to making sure you continue to build up your reserves is to have a balanced plan, one that means you can continue to enjoy the present while also preparing for the future.

What’s the point of saving?

This can seem like a very good question, especially during difficult economic times when money can be limited. Yet, money has a big part to play in how we live our lives. And putting money aside now to cover big events, little treats and even the unexpected can mean more peace of mind and greater financial freedom.
The importance of a balanced savings plan

What’s the best way to save money?

While saving can seem like a chore, if you follow some basic principles it’s much easier to get into a manageable and lasting habit.

Be realistic

We all have different amounts of money coming in and going out. So, if you try to hit some arbitrary savings figure, or match what other people are doing you could be setting yourself up for a fall. And that can be damaging because it could put you off saving altogether. The key is to be realistic. Save what you can and avoid unachievable targets.

Little and often

This ties in with being realistic and is the surest way to building and maintaining a savings habit. Regularly saving small chunks of money means less pressure on you and will add up over time to pots of money that could make a big difference to how you live your life.

Say hello to your inner Scrooge

There’s always pressure to spend money, from days out and bills to split, to the latest brands and hikes in service charges. One of the saving graces of the digital revolution is the rise of comparison and voucher sites, which can help you make surprising savings on essentials and day-to-day living.

Embrace the power of pots

Having different pots for different things makes it so much easier to manage your savings. As a starting point it’s good to have a day-to-day pot, a short-term savings pot, an emergency pot and a retirement pot. We’ll cover in a moment what sort of accounts and savings tools are best for these different pots.

The pay day savings rule

Once you’ve decided on your different savings pots and a realistic amount to put in each one every month, the next step is to transfer the money. And the only sensible way to do this is to make sure it happens as close to pay day as possible. That way, you know your savings pots will always be fed and you know exactly how much money you have for the rest of the month.

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How and where should I save my money?

Let’s look at some of the different pots you could have, and what tools you can use to save your money.

The day-to-day pot

This could cover regular monthly expenses, such as bills and food shopping. You’ll need to keep this money somewhere with no restrictions on the amount of withdrawals you can make, such as a current account. It’s worth shopping around for a current account with good interest rates, so that any money left at the end of the month has the chance to grow.

You can always subdivide this pot by withdrawing a set amount of cash each month to cover daily expenses, such as food and travel. Digital payments are fine, and you’ll often get financial discounts for setting up direct debits to cover bills. For other expenditure, there’s nothing like a pot of cash to help you stay disciplined because it’s much easier to monitor and manage how much you are spending.

The short-term savings pot

You can use this to save for bigger outlays such as holidays, new clothes and devices, and big events. A savings account can be a good tool to use because you should get higher interest rates. Some savings accounts come with restrictions, though, including how many withdrawals you can make in a year. So, have an idea of how often you’ll need to access this pot and then shop around to get the best account for you.

The emergency pot

You could bundle this together with your short-term pot, although it often makes sense to keep this separate. It can cover unexpected breakdowns to everyday necessities. It can also act as a buffer if there’s a drastic change to your job situation.

Ideally, this pot will be big enough to cover you for at least two months if you have no other income coming in. If that seems daunting, remember that you don’t need to build this pot all in one go.

The retirement pot

Your pension is a vital part of your savings plan. And the good news is that recent changes to auto-enrolment mean it’s easier than ever to build a personal pension pot for when you want to cut down the hours or stop working completely.

Currently, if you earn £10,000 or more and are over 22, your employer must offer to enrol you in their workplace pension scheme. 4% of your wages go straight into the pot each month. You get another 1% from the government in the form of tax relief. And your employer must contribute an extra 3%, which is effectively free money. Some employers will pay more than this 3%, and you can always choose to contribute more.

Personal pensions are becoming increasingly important because of the decline in final salary schemes. These pensions promise to pay you a set amount of income each month for the rest of your life. This makes them extremely valuable. However, they can be very costly schemes for companies to run, which is why they are becoming few and far between.

Currently, the full State Pension is £168.60 per week, which will give you an annual income of £8,767.20. Is this going to be enough for you to live on when you decide to say goodbye to the 9 to 5? The chances are you’ll need to top this up with another source of income and this is why personal pensions are becoming increasingly important.

Not all personal pensions are the same. Some are great, with low charges and an impressive performance history, backed by a proven investment philosophy. But there are also some really poor schemes out there. That’s why it makes sense to check your pension every couple of years or so. If it is letting you down then changing it to a better scheme could make a significant difference to your retirement pot.

 

Over £20,000…this is how much better off a 55-year-old could be if they switched their pension today1

1Based on a £50,000 pot at 55 and how much it’s worth by 67 based on a 1% difference in both charges and annual returns.

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