The following is a guest post, please contact me if you would like to guest post on Reach Financial Independence
Thinking of the future and putting away for a rainy day can sometimes be the last thing on our minds in today’s world. With such an unstable economy and prices for everyday goods soaring, savings can be the last thing on our minds when making ends meet is such a struggle.
The first thing to bear in mind though, is that if you’re thinking about starting to build your savings it’s important to pay off any existing debts first. The reason for this is that the interest you will be charged for most forms of credit will be much greater than any you will receive from a savings account. If you’re not sure how much debt you have try out our handy debt calculator. Make sure you are not losing money as you save! If you have the money, pay off your debts or else they’ll simply get bigger and bigger.
How to save
Surely a full paragraph dedicated to ‘how to save’ will be a bit patronizing, right? Well, ‘Don’t spend all of your money each month’ should pretty much cover it but as we all know, it’s easier said than done. So here are some helpful tips to get you on the right tracks.
Taking the approach of putting away whatever is left in your bank at the end of your month can be efficient if you view seeing how big a chunk of your wages you can leave there as an incentive. However this carries with it the temptation dipping into this leftover fund for whatever luxuries may take your fancy.
Deciding what you are able to save each month prior to actually beginning your expenditure can be a big incentive in helping you not dip into the amount you decided to save.
The key to success with either of these approaches is budgeting. If you plan exactly what you know you need to spend each month then you can know exactly how much you can spend.
Budgeting
Trying to save money can be as easy as adjusting your spending habits by as little as purchasing the a lower level of brand than normal. For Example, if you would normally purchase a leading brand, switch to a supermarket’s own brand or if you already purchase supermarkets’ own brand products, switch to value brand products. This simple strategy could save you small fortune on your weekly food bill.
Although this strategy is effective, and this applies to almost any money saving strategies, you need to plan your purchases. It’s no good judging your expenditure on an item to item basis; you need to plan out your spending for the month in order to avoid unnecessary spending.
Where to put your money
A Cash ISA is a very simple way to begin your savings, anyone in the UK over 16 can set up one up and you can do it with your existing bank you have your current account with. The Cash ISA will allow you to deposit just over £5,000 per year, tax free! You can deposit more however you will pay tax on the interest you gain from the amount above this figure. You can Deposit this amount each year and you can also open up 1 Cash ISA account every year.
This means that after your first year of savings you can open up your second Cash ISA and that will allow you to deposit over £10,000 Tax free in your second year of savings.
You can open up a new Cash ISA and deposit up to £5,640 Tax free every year, so if you already have a Cash ISA then you will be able to open up a new one as early as April!
good tips. I prefer to invest my ISA allowance in stocks and shares since the potential return is higher, the tax free savings make more sense this way. Current cash ISA rates are at best 3% whereas you can expect more with simple index trackers.
that is a smart move, I started with a cash ISA as well and then kept investing in stocks when the rates fell.
Don’t forget that with an ISA if you withdraw money, it is lost, you can’t put it back again!
true. I didn’t know that at first and thought you just had to deposit your allowance by April, learned the hard way.
My wife and I started a budget three years ago, and 2012 was the first year we were able to max out our retirement accounts! It really helped us realize where money was going and get back in shape.
congrats on the achievement John! Budgeting is very helpful to see little expenses that add up over time and prevent you from reaching your goals
I agree on budgeting in order to limit the overspending habits. My family is not fan of buying status symbol objects. We try to avoid buying things whose value will depreciate over time like expensive watches or clothes.
I agree with you but still try to buy quality items. For clothes I would rather spend $50 on a quality shirt that will last for years than $10 on a poor quality shirt that will last for a few month.
ISA or SIPP (Self Invested Pension Plan)? There are advantages to SIPPs because many enable a rather broader range of investments. Anyway we need to start looking at this now!
I looked into SIPPs but from what I understand you can’t take the money out until retirement? I like the fact that the ISA is instant access. SIPP has the advantage of the tax claim for higher rate taxpayers. You can use an ISA while you are still a 20% taxpayer and then move it to SIPP when you reach the 40% bracket.
You are right of course. ISAs are simpler. Under SIPPs you can withdraw up to 25% tax free but not until you are 55…… Then the rest can be withdrawn if you have alternative pension of £20k or more or you can use drawdown or if you are really desperate, buy an annuity but as we said in our ‘retirement calculator’ annuities are a really bad deal overall.
55… that’s a long time away :)! I am sticking to ISAs for now, unless an investment can’t be thrown in there. I saw some property investments abroad could be put in a SIPP but not ISAs for example.
Thanks for the friendly tips regarding saving.
Well, I actually consider myself budget conscious. I’ve been doing budgeting since I was 19. SO glad I started very early cos I can now handle the finances easily.
Anyway, I like your debt calculator, pretty interesting, but is there any way to change the currency into $ or something else?
I don’t think so Ashleen, this site focuses on UK debt management solutions, the rules depend on each country’s law so you would have to look for one for the location you need.
Great post, Pauline! Savings seems to be simply foreign to so many people, doesn’t it? I saw a great post on a site a couple of weeks ago that said “Just start by saving 1% of your take home pay each paycheck”. I thought that was good advice. 1% isn’t much in the grand scheme of things, but it gets you in the habit of saving and will eventually add up.
yes, it is like running, you can’t run a marathon or even try to straight away, you have to start small. There is another challenge over the course of the year, you save $1 the first week, $2 the second one, etc. and $52 the last week. You should have well over $1,000 by the end of the year. You can then keep growing that the next year until it is a real stretch for your budget. Like the 1% if you increase gradually it doesn’t hurt so much.
Pay yourself first, and think about the old person version of you. Would you want that tired old person to have to work? That type of visualization can get one motivated to start saving!
future you can certainly help! I think about freedom and would today me want to work for X hours to pay for that, it works quite well too.