How to start saving money to reach your goals
Saving money doesn’t have to mean missing out on what you enjoy or putting aside huge wads of cash, either.
Below, we’ll look at practical ways to start saving money – including which savings accounts are available and how they work, as well as tips on how to set practical goals and get started.
Steps to start saving money now
The question is: how can you start saving money right now? Well, firstly, there’s no perfect time to start saving so if you feel like you have catching up to do, don’t worry – the important thing is to simply begin.
Here are some practical ways to start:
Start an emergency fund – if you’re starting from scratch, it’s worth putting aside a few months of essential expenses, like rent and bills, into an emergency fund so you have a financial safety net. Consider doing this before building savings for any goals that are not so urgent and under five years away, such as holidays.
Pay off your debts – if you can, clearing any high-interest debts such as credit cards and payday loans should enable you to save more money over time. Do this first before thinking about saving.
Be honest about your finances – take stock of your income, regular bills, subscriptions and general spending. And be honest with yourself – could you cut a subscription you don’t use or cut down on meals out? If the answer is yes, you’ll likely be wealthier in the long run.
Set yourself a budget – consider the above, set yourself a realistic budget and try to stick to it as best you can.
Start as soon as you’re paid – transfer the amount you want to save into your savings account on payday, then leave it there, untouched.
Try simple savings challenges – try saving £1 a day. This can help you build the habit, without too much effort.
Switch to an account with a better savings rate – consider whether your savings are earning a competitive interest rate. Keep an eye out for deals and consider switching if you see a better interest rate.
Set a savings goal
It helps to set a specific goal or goals that you can achieve within five years. And for anything over five years, you might want to consider investing. A general savings pot is easy to dip in and out of – whereas a savings account, set aside for a specific reason, gives your money a job to do. Common savings goals include buying your first or a new home, a holiday, home renovations, planning for your children’s future or retirement.
Bear in mind, though, you’re not limited to just one goal. You could have numerous savings pots for different purposes, for example, saving for a holiday while putting aside money for your child’s education.
How to prioritise savings goals
Think about your current situation – this will help you figure out what to save for first.
For example, if you’re starting out with no savings at all, it’s worth creating an emergency fund – aim for around three to six months’ worth of essential expenses such as rent and other bills if you’re working, or one to three years’ worth if you’re retired to provide peace of mind.
On the other hand, if you already have savings in place, you might focus more on your retirement fund. Either way, regularly reviewing your priorities will help keep your financial plans on track.
Different ways to save
Putting your money into a savings account is a good way to make your cash work harder. Unlike current accounts, which tend to earn little to no interest, savings accounts come with different options, timeframes and flexibility to suit your goals.
Here are some common savings accounts and how they work:
Savings account
With a savings account, you can deposit cash and earn interest on your balance – often with easy access when you need it most. It’s important to remember, though, that rates and features will vary and it’s worth understanding this before taking one out.
Cash ISA
Just like a savings account, a Cash ISA lets you deposit cash but, unlike a standard savings account, any interest earned is always tax free. Cash ISAs are a tax efficient way to save, though your annual limit is still £20,000 per year across all ISAs. It’s also worth remembering that tax rules change and benefits will depend on your personal circumstances.
Savings accounts vs ISAs
The main difference between savings accounts and ISAs is tax. With a savings account, you could be taxed if your interest exceeds your personal savings allowance. Whereas ISAs shield savings from UK income tax altogether, making them an efficient way to save money.
When should I start investing?
Saving is putting money aside safely for short-term use with low risk and low returns, while investing is using money to try to grow it over time with higher potential returns but greater risk.
Although keeping your money in a savings account can be a safe option, interest rates don’t always keep up with inflation. In short, then, when prices rise quicker than interest rates, the actual value of your money can fall.
Indeed, investing in the stock market has generally offered higher returns than holding cash alone for goals that are at least five years away. This is why many people choose to start investing once they’ve built a solid emergency fund. It’s also important to remember that investing is best suited for goals at least five years away. And unlike cash, investments can fall in value, so you could get back less than you put in.
Savings FAQs
This depends. As a rule of thumb, aim to save around 20% of your income if you can. Most importantly, though, save anything you can, consistently.
Your savings are taxed only on the interest you earn, not on the money you save.
In the UK, you can earn interest up to your personal savings allowance tax free; any interest above that may be taxed, while savings in ISAs are always completely free of UK income tax.
This depends on your circumstances, savings goal and where you are right now. By breaking down your goal into monthly contributions, it’s easier to estimate a timeframe and adjust where needed.
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The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.
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