Most people in the UK don’t have enough in savings. At least 34% of adults have less than £1,000 set aside. While this might not be too much of an issue day to day, a shortage of cash can quickly become a problem if you are faced with an emergency need to make a large purchase.
Growing your savings can be challenging, especially when costs seem to be rising every week. In this guide, we provide a few tips for building up your cash balance.
Decide How Much You Need
Your cash accounts serve three main purposes:
- Covering your regular bills and lifestyle expenditure.
- Funding any shorter-term goals or planned spending, for example, a holiday, car, or property deposit.
- Providing a buffer in case you are faced with a financial emergency.
The amount you need for emergencies will depend on your circumstances. It’s usually a good idea to keep around 6 months’ expenditure for this purpose. This might seem like a lot, but if you were out of work for a few months, or unable to work for health reasons, it’s likely to be the minimum amount needed to get you back on your feet.
If you are self-employed or have a lot of financial responsibilities (for example, a large family or substantial amounts of debt), it may be a good idea to keep even more cash readily available. If you are retired or are already financially secure, you might decide you don’t need as much as this.
Build Good Savings Habits
Once you have decided how much you need, the next step is to start saving. This is easier said than done, but following the steps below should help:
- Create a budget so you know how much you have coming in and going out every month. If you have a surplus, you can start to think about how to use it. If you have a shortfall, you may need to make some cutbacks or earn more money.
- Have separate accounts for bills, discretionary spending and saving. This can help to keep control of your finances.
- Set up a direct debit or standing order into your savings account on the day you get paid. This means that you are less likely to miss the money. Waiting until the end of the month can make it more tempting to spend.
- Only dip into your savings for planned spends or necessities. If you do take more than you intended, try to replace it as soon as possible.
Shop Around for the Best Account
As interest rates were negligible for many years, shopping around for a savings account may have seemed pointless. But with the increase to the base rate, many banks are offering competitive deals. It’s worth comparing options to ensure you have the best account.
The main types of cash account available are:
- Easy access accounts – these are simple with no restrictions, but the rates may be lower than some other types of account. It’s usually a good idea to have your emergency fund in an easily accessible account.
- Fixed term or notice accounts – these offer higher rates of interest but have restrictions on when you can access the money penalty-free. These accounts can be useful if you are saving for a particular goal.
- Cash ISAs offer tax-free interest, but again, the rates may not be particularly competitive. If you have a savings allowance to make use of and are considering investing, a Stocks and Shares ISA might be a better use of your allowance.
- Lifetime ISAs could be suitable if you are saving for a first home. In addition to your own savings, you receive a 25% credit from the government. There are a number of conditions, which means they may not be the best solution in all circumstances.
- Premium bonds, offered by National Savings & Investments (NS&I) are a secure deposit backed by the UK government. Interest is not paid out regularly, but funds a monthly prize pot. Account holders can win up to £1 million in every draw, with a number of smaller prizes available.
For example, If you have £10,000 in savings and received interest of 4% each year, by the end of the year you would have an additional £400. If you let the interest accumulate, the following year you would receive £416. This continues exponentially, creating a snowball effect.
10 years of compounding could potentially provide you with approximately £4,800 in total interest. This means you will be £800 better off than if you had withdrawn the interest every year.
Over time, these small increases can make a significant difference to your savings pot.
However, if the rate of return of your savings is lower than the rate of inflation, then even though the value of your savings may be increasing the buying power in real terms will actually be falling.
If you have an adequate emergency fund and enough money to cover your planned spending, you might want to consider other options for your surplus cash. Even with competitive interest rates, growth on cash is consistently behind inflation. This means that as the cost of living rises, your money loses purchasing power and will be worth less in ten years than it is now.
Investing is one of the best ways to beat inflation. Of course, the value can rise and fall, and some investors will lose money, especially in the shorter term. Our investing tips are as follows:
- Invest across a diverse range of assets. This can help avoid concentrating too much risk in one area and smoothing out some of the volatility.
- Invest at an appropriate risk level. Equities offer potentially the best chance of long-term growth, but also carry the most risk. A confident investor with an investment timescale of ten years or more can probably accept this risk comfortably. For anyone else, mixing in some bonds, cash, and property can help to stabilise some of the volatility.
- Avoid trying to time the market, whether this means chasing higher performance or avoiding further losses. It’s rarely effective and can damage your returns.
If you are investing for the first time, making monthly contributions to a pension or ISA (or ideally, both) is usually a good place to start. If you have a lump sum to invest, are a higher earner, or have already maximised your pension and ISA allowances, it’s worth seeking advice to make sure the investment meets your needs and is tax-efficient.
The value of an investment can go down as well as up and you may get back less than the amount invested.
The content in this article was correct on 02/11/2023.
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers independent financial advice on savings, pensions, investments, mortgages and mortgages for teachers and non-teachers. This article does not constitute individual financial advice and professional advice should be sought for your specific circumstances. Please use the contact form below to arrange an informal chat with an adviser and see how we can help you.