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This is a collaborative post.
Saving is an important financial goal for people of all ages and all life stages. However, knowing how to save can be challenging. If you’re trying to work out the best ways to save (and don’t we all?), this guide will be helpful for you, I hope.
When managing your finances, it can be helpful to consult reliable resources to stay informed about budgeting, saving, and financial planning. Guidance from experts, such as those available at PMW, can provide practical insights into organising your money, tracking expenses, and planning for both short- and long-term goals.
Why save?
Learning how to plan your money is a vital skill. Should be taught in primary schools, even. (But it isn’t really, which is a shame.) Like with many things in life: learning it the earlier, the better. Good money management means you’re well-placed in the event of an emergency where you might need funds for an unexpected bill and longer-term living, such as when you retire. As the cost of living remains high, budgeting in a way that allows you to save can also help should you need to have the funds in your account to cover events like birthdays or Christmas.
It’s possible to get into the practice of automatically placing funds in a separate account. But there are ways to save that can be beneficial for you.
Setting financial goals
Start with your goals. Having clear financial aims in place can make saving sensical. Try dividing these goals into into short-term, medium-term, and long-term objectives:
Short-term goals (up to 2 years)
Saving for a holiday, creating a small emergency fund, or buying smart tech for the home are examples of goals that you’ll fulfil in the near future. Using a regular savings account might be suitable for this type of savings target.
Medium-term goals (2-5 years):
Where you’re saving for a car or renovating your home, these are the mid-point goals. Higher interest savings accounts or ISAs (Individual Savings Accounts) could maximise returns here without taking on too much risk.
Long-term goals (5+ years):
These could involve planning for retirement, saving for a child’s education, or buying a home. Considering a mix of savings and low-risk investments can be beneficial.
Choosing the right savings account
Selecting the appropriate savings account is important. This is because it could maximise your savings. Common types of accounts available in the UK include instant access savings accounts, which allow you to withdraw money whenever you need it. However, the interest rates are usually lower compared to other accounts.
ISAs are another type of account. These offer tax-free interest, making them a popular choice. There are different types of ISAs, including Cash ISAs and Stocks & Shares ISAs. The former is suitable for low-risk savers, while the latter allows for investment in the stock market.
Fixed-term accounts are where you lock in your money for a set period. These often offer higher interest rates as a reward. They are ideal for medium to long-term goals where you don’t need immediate access to your funds.
Building an emergency fund
This safety net is designed for unforeseen expenses like medical emergencies, car repairs, or job loss. It’s recommended that we each save enough to cover three to six months’ worth of living expenses. Here are some tips to help set up an emergency fund:
- Automate savings: Set up an automatic transfer from your current account to a dedicated savings account each month.
- Start small: Begin with a manageable amount and gradually increasing this as you become more comfortable with saving.
- Separated them: Use a separate account for your emergency fund to avoid the temptation of dipping into it for non-emergencies.
Investing in Low-Risk Options
For those looking to grow their savings with minimal risk, low-risk investment options are a good choice. Examples include:
- Government Bonds: Known as Gilts in the UK, these are considered very safe and offer a fixed interest rate over a specified period.
- High-Interest Savings Accounts: While slightly riskier than regular savings accounts, they offer better interest rates in exchange for some limitations on withdrawals.
These options can complement your regular savings, providing a balance between safety and growth.
Exploring higher-risk investments
For individuals willing to accept higher risk in exchange for potentially greater returns, exploring higher-risk investments might be worthwhile. These include:
- Stock trading: This form of trading involves buying and selling shares in companies with the potential for significant returns. However, stock trading requires thorough research and a good understanding of market trends.
- Mutual funds: These funds pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They offer professional management but come with fees and varying levels of risk.
It is crucial to understand the risks associated with these investments and to only invest money that you can afford to lose. Diversifying your investment portfolio can also help balance out some of the risks involved.
Once you get into the habit of saving, you can make important decisions about whether you want to stick to the savings style you have in place or opt for higher-risk strategies. Plan carefully and consider your circumstances with any type of move you make.