What is your attitude towards saving?

Before you read on, please note that the following is merely my thoughts and opinions and does in no way constitute financial advice.

These days people tend to spend what they earn and then borrow some more to keep them going until payday. Interest rates are low and credit is relatively cheap, which has lead to some people feeling more comfortable about being in a position of debt.

We all work really hard, so it’s not unreasonable to want to reward ourselves with a nice house, a nice car, luxurious holidays and eating out at fancy restaurants etc. What’s the point in working so hard if we can’t enjoy it?

 

Are you caught in the rat race?

Most people look forward to retirement or at least to a point where they have the financial freedom to decide whether or not they want to work. However, they mistakenly think that this is outside of their control and they have to work until the age the Government dictates.

If you diligently save a small percentage of your earnings then over time this can grow massively through the power of compounding.  That pot can be earning you money while you sleep.  When the pot grows to your target amount then you can decide whether or not you want to continue to work.  This is the benefit of saving.

 

How much should you save? 

The general rule in most publications is at least 10% of your net pay each month e.g. if you take home £3,000.00 per month then you should be saving £300.00.  For some of you this will be easily doable and for others, you won’t be able to see where you will get this from.

 

Struggling to find any disposable income?

1.       Create a budget – you can either make your own spreadsheet on Excel or just find a free tool online.  You can’t  accurately identify where your money is going until you note everything down.

a.       Look at some of your outgoings to try and identify what could be cut / reduced. For instance, do you really need a Sky TV subscription when you have Netflix / Amazon?

b.      When was the last time you did a price comparison on your utilities and insurance etc.  Money Saving Expert has some great tips for freeing up disposable income.

Once you have an accurate picture of where you are then you can take the next step.

 

2.       Automate your savings – setup a Direct Debit that takes out your designated amount from your current account directly to your savings account(s) at the beginning of each month before anything else comes out.  Like a wallet full of cash, your account will inevitably empty until it gets topped up so it’s important that you save first before you find others way to spend your money.

 

Saving Strategy 

1.       Do you have any debts (including your mortgage / student loan) – if you do how much interest are you paying on that debt?  Can you earn more interest by investing the money?  Do you just want to reduce your debt?

If you can earn more interest than the interest you’re paying on your debts then it is reasonable to invest as an alternative to repaying debt. However, if that return is not guaranteed then it may be more prudent to repay some of the debt, as that immediately reduces the debt and the interest that is payable, which offers some protection if the interest rates were to rise in the future.

You should primarily be looking to reduce any bad debt before saving.

 

2.       Do you have a sufficient cash emergency fund – this is largely dependant on your circumstances but around 3-6 months earnings of instant access cash if you are made redundant or for other emergencies?

Once you have reduced bad debt, your next step is ensuring that you have an adequate emergency fund.

 

3.       Do you maximise your ISA – the current ISA allowance is £20,000 that you can invest tax efficiently.  This should be your primary savings vehicle for your investments.

If you satisfy points 1 and 2 then you’re in the position where you can look to invest your monies.  Where to invest depends on your financial knowledge and attitude to risk.  There’s plenty of information out there and it’s important to start the process of saving rather than spend a lot of time procrastinating about the best place to save the money.  However, if you want to beat inflation and benefit from the powers of compounding then I would not advocate saving additional monies on top of your emergency fund as Cash.

 

4.       Do you have a pension – from your employer or a private one that you have created?  If you’re employed then it’s worthwhile taking advantage of any contributions your employer is willing to contribute.  If you’re self employed then this can be used to reduce your corporation tax / higher rate tax liability.

Controversially, if you do not have a pension yet and you do not maximise your ISA then it may be worth focusing on this over a pension.  The main reason being the accessibility of the funds with similar preferential tax treatment.  What you lose from the tax efficiency of the contributions you gain when it comes to taking the money out of the fund at a time that you would like rather than being dictated by law and the income will not be taxable unlike pensionable income.

 

Recommended Reading:

  • How to Own the World (Andrew Craig) – a very good overview of the UK economy, why you should save and what you should be looking at doing.

 

  • Rich Dad Poor Dad (Robert Kiyosaki) – something that can alter the mind-set that has been drilled into us all from a young age.

 

  • The 4 Hour Work Week (Tim Ferriss) – shows that you should account for your time as well as monetary implications when doing a cost analysis.

 

  • I Will Teach You to be Rich (Ramit Sethi) – provides some guidelines on how to autopilot your personal finances.

 

  • The Richest Man in Babylon (George Clason) – covers the fundamental requirement to save 10% of your earnings.
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