Savings guide

Tips to help you get into the savings habit so you can watch your money grow.

Getting into the saving habit is easier than it sounds and will give you greater long-term security and peace of mind. There's no time like the present to develop savvy saving habits that can help you become financially independent.

Since 6 April 2016 interest is paid gross (without taking off tax).

If you earn more interest than the Personal Savings Allowance, you may have to pay additional tax yourself.

The Personal Savings Allowance is £1,000 for basic rate tax payers and £500 for higher rate tax payers. Additional rate tax payers do not receive a Personal Savings Allowance.

Do you have any extra money sitting in your current account?

Not sure how much interest you're making on your savings?

Do you think you could save more if you changed some of your spending habits?

Are you hoping to splash out on something special in the future, but don't know where the money will come from?

Answering yes to any of those questions means you should consider how you could make your money work harder for you - both in the short and long term. And that means: saving.

Of course, thinking about tomorrow when today's demands are so pressing can be difficult. However, with housing and retirement costs rising, plus all those other costs along the way such as your children's education or even the threat of redundancy, it's more important than ever that you get smart about saving.

Why save?
There are many reasons why people save, but here are the three main ones:

1) So you're safely covered for life's unexpected twists and turns.
As a rule of thumb, it's a good idea to have at least three months' worth of living expenses saved up to protect yourself and your family in case you can't work due to an accident, illness or unemployment. However, if you're like a lot of people, you may not have this much available.

You may never need to use this money but knowing it's there puts your mind at rest, especially in a volatile economy.

2) To create a lump sum for improving your lifestyle - and your family's lifestyle - in the future.
A deposit on a house? Tuition fees for your children when it's time for them to go to university? A comfortable retirement? At some point in the future, you will probably need to have access to a sizable amount of money that you can either use all at once or draw on over time. Either way, you should start saving toward that day now, because the sooner you start, the sooner you will reach your goal.

3) So you can buy a particular item in the future that you can't afford right now.
This is the exact opposite of buy now, pay later - which was the prevailing attitude in the recent boom times. Wouldn't it be great to have money in the bank you could use to buy the things you wanted or needed without increasing your debts?

How safe are your savings?
You may be worried that if you tie your money up in a savings account, it won't be protected. However, the Financial Services Compensation  is an independent body that serves as a last resort to cover most deposits, including savings, paid in to retail bank accounts. So, if for some reason your bank couldn't return your full savings deposit, the majority of your money would still be protected.

Your first step should be to clear most or all of your debts as quickly as you can. Then, you should find a way of budgeting to save a little each month. To get in the savings habit, aim to put aside a day's pay after tax every month.

Your next savings priority should be to set up a little pot of money for emergencies in an instant access savings account. You may find it helpful to set up a standing order to your savings account on payday. That way, the money will be transferred on a regular basis before you've had a chance to spend it and you probably won't even miss it.

Savings in the short-term
Whatever crops up in life, whether it's an unexpected bill, a sudden repair job or a shock redundancy, having some money saved up can help you take care of it. Ideally, you should have enough money set aside to cover you for at least three months, but exactly how much you save will depend on your own circumstances.

There are several different types of savings accounts. They differ depending on how much interest they pay and how long you will need to leave your money alone before you can claim that interest. But, if you think you might need to take your money out of the account at short notice and don't want to pay a fee or lose interest if you do, then an instant access savings account is a good choice.

So, if you have some spare money at the end of the month, then you should think about starting to develop some short-term savings habits.

  1. Set up a simple, instant access savings account. Move any spare money you have at the end of the month to this account.

  2. Set up a standing order for an amount you can afford straight after payday. Start small then build.

  3. If you receive a bonus or pay rise, it's a good idea to use some or all of this extra money to start a savings account or add to one you already have.

  4. Set up a budget on your spending.

  5. Be disciplined. Set a savings goal and stick to it.

  6. A cash cash ISA  is also a good option as it is a tax efficient way to save. This is a savings account that pays interest tax-free up to specific limits. 

  7. You can also use your full ISA allowance to invest in a stocks and shares or innovative finance ISA which can be other ways to save tax efficiently.

  8. You can often get extra interest if you are prepared to tie up your money for a set number of months with a 'term deposit' or savings bond. These types of savings products may offer a better interest rate but make sure you only put money in there that you won't need in the short term.

Once you've got into the habit of saving for the everyday, it's time to start thinking about longer-term savings.

Savings in the long-term
It's good to have some savings you can instantly access in case of emergencies. But, it's also worth thinking about saving for the future and your retirement. Putting together a savings plan now will give you greater long-term security and help put your mind at rest.

Here are some tips to guide you as you start thinking about long-term savings:

  1. To make the most of your money, make sure you take advantage of your tax-free annual ISA allowance.

  2. You can help protect your family's or dependants' financial security by taking out life insurance. You could get a lump sum of money in the event of your death or if you're diagnosed with a terminal illness, helping ensure that any outstanding debts such as a mortgage would be paid off.

  3. More and more of us are now living longer, so at some point you may want to consider your income in retirement. Speak to your employer to see if they provide a pension or are prepared to contribute on your behalf. Some will match any money you put in yourself.

  4. You're never too young to make a will. If you die without one, any possessions you own such as your house, jewellery, a car, artwork, etc, may be distributed according to the law rather than how you'd like. By sorting your will out early, you can also make sure your beneficiaries don't pay more inheritance tax than necessary.

Make saving money a habit
Saving money doesn't have to be a chore. There are some easy ways you can get into the habit of saving money on a regular basis. Here's how:

With a standing order, you tell your bank to pay money from your chosen account to another account at regular intervals - for example, once a month. You could set up a standing order into your savings account once you've been paid, which is an easy way to save.

Some banks now offer you the ability to round up the amount you spend on your debit card to the nearest pound and transfer the difference into your eligible savings account. This is a painless way to start adding to a savings account.

Take the first step in sorting out your finances
Sorting out your finances seems so simple when you read about it, but when it comes to putting ideas into practice, it can be difficult to know where to begin. In fact, the more good advice you get, the more daunting it can seem to actually do anything at all. And that's enough to put a lot of people off getting started in the first place.

It's far more important to just do something than to try to do everything perfectly. The first step is easy - just write down one or two sensible things to do and put a date in your diary to do them. Here are a few suggestions:

Start asking yourself questions about where your money is going and why. By working through a monthly budget to see where your spending goes, you'll know where you can make cutbacks. You can then use any money you save to start or add to a savings account.

Give yourself targets for the maximum you want to spend in different areas such as transport, food, rent, bills and entertainment. You'll be amazed at how much you spend on these things when you add it all up.

Maximise your ISA allowance for this tax year. Remember, you can save up to £20,000 in the 2017/2018 tax year.

Set up a standing order to go out of your account and into a savings account as soon as you get paid. And don't forget, if your income increases, by increasing the amount of your standing order at the same time, you will be able to save more without noticing it in your monthly budget.

If you get a windfall of money, think about putting a percentage of it into your savings.

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