The next step is to develop your savings habit and try to earn more from your money. From making it automatic to considering investing for those longer-term goals, here are some tips that could help you on your way.
One of the hardest parts of saving is remembering to do it. If you take the need to remember out of the equation, you could reach your goals much quicker.
So whichever type of account you use to save your money, make it automatic. Set up a standing order or a Direct Debit and have it come out of your account on pay day. That way you can set it and forget it, knowing your saving habit will take care of itself.
It can be disheartening trying to save for a longer-term goal if you keep having to raid your savings to pay for things like a car repair or a replacement washing machine.
It’s hard to predict if and when you’ll need this money - so emergencies should always be the first thing you save for. Make sure the money’s kept in an instant-access account so you can get your hands on it if ever you need to. And avoid the temptation to dip into it for non-emergencies – like a holiday, for example.
Use our financial fitness score tool to see how resilient you are and set savings targets.
Once you’ve got your emergency fund, take your savings habit to the next level by working out exactly what else you’re saving for.
You don’t have to choose between saving for short-term and long-term goals. Ideally, you’ll do both. But for each goal, you need to be mindful of when you think you’ll want to spend the money.
Why? Because being clear and considered about what you’re saving for and when you’ll need the money determines where you could put your cash.
For money you’ll want to spend within less than 5 years – say, for a new car or a house deposit – it makes sense to keep it in a savings account. Because if you were to invest, you could potentially suffer losses in the short-term and not have cash available when you need it.
But as you know, not all savings accounts are the same. With a fixed rate account or a regular savings account you may be able to earn a slightly higher interest rate in return for locking your money away for a fixed period of time.
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When saving for longer-term goals, there’s an added complexity you need to beware of: inflation.
Inflation is the rate at which the price of goods and services increase. As things generally become more expensive over time, inflation reduces the value of your money.
To bring home the impact of inflation on your future savings, it can help to look back at what £1 would have bought over the last few decades1:
1970: £1 = 10 loaves of bread
1980: £1 = 3 loaves of bread
1990: £1 = 2 loaves of bread
2000: £1 = 2 loaves of bread
2010: £1 = 1 loaf of bread
2020: £1 = 0.93 loaf of bread
What does this mean for your savings? For each year when the rate of inflation is higher than the rate you earn on your savings, your money is effectively shrinking in terms of what it can buy.
If you’ve got an adequate emergency fund in place, you might consider switching some of your monthly savings contributions into an investment fund. Because while savings accounts are considered safe, the interest rates they earn are often less than inflation – and some earn no interest at all.
Investing should always be seen as a long-term strategy of 5 years or more. The longer you invest for, the longer you’ll have to recover from any market falls. Over the long term, investing gives you the potential to earn better returns than saving. But there are no guarantees. Your money can go down as well as up in value so you could get back less than you invest.
If you’ve never tried it before, you might think investing is just for the experts. But it can be surprisingly easy to get started.
You can invest in ready-made portfolios of funds, which spread your money across different types of investments. That way you don’t have to research, choose and manage your own stocks.
Eligibility criteria and some fees apply.
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1Source: Office for National Statistics