Wednesday 26th January 2022
What it’s all about?
This article’s designed to help you:
It’s tough to decide how much of your salary you should save, no matter what you earn. Honestly, a lot of it depends on your personal situation. If you’re on a fairly high income, you’ve probably got a few more options, for instance. Of course, that also means you’ve got trickier decisions to make – and probably more of them.
Set your priorities
The first thing to look at is how much cash you’re bringing in each year. Once you’ve got a clear picture of your income, you can start to decide how much of it should be saving. So, for instance, if you’re following the usual kinds of advice floating around, you’re probably trying to stick to the “50/30/20 rule”. If you don’t know about this, it basically just means you’re trying to handle your spending so that:
The thing is, that rule really only works when you can afford to stick to it. Not everyone can balance their books so their essentials get covered that easily, for instance. Even so, there’s an important lesson to learn here. All these kinds of “rules” are really trying to do is help you get your priorities straight. For instance, it won’t do you any good to stock up your savings if you’re digging yourself into debt to do it. Interest on things like loans and credit cards will almost always pile up faster than it does on savings. In the long run, you’re just digging a deeper hole for yourself by ignoring your debts.
As for your actual savings, a basic target to aim for is having an “emergency fund” that could cover your essential costs for 6-12 months. With a bit of luck, you’ll never need to rely on it for that long – but even so, it’s worth having so you can handle unexpected stuff like a job loss or some sudden repairs. Don’t fall into the trap of sticking your emergency fund where it’s hard to get at, either. Basically, keep it in something like a normal savings account where you’ve got good access to it in a pinch.
So much for the basics. Now let’s look at how much of your salary you should be saving at a few rough income levels:
Keep a tight grip
So, at around £20,000 a year, keeping a tight grip on your most expensive debts is a smart move. This is where focusing on paying those down before worrying about saving money really pays off. Depending on where you’re borrowing your cash from, you might be looking at interest rates of anywhere between 9% and 20%. Those will creep up on you fast if you leave them sitting there. Once your essential costs are dealt with, bump paying off these debts to the top of your priority list. When you’re in the hole, the first thing to do is stop digging.
Of course, that doesn’t let you off the savings hook altogether. Saving money where you can, and as regularly as you can, is always a good habit to get into. In fact, you could well end up better off by saving small amounts more often than by dumping the occasional lump of cash into your emergency fund. It’s about getting used to saving whenever possible, without straining your wallet too hard.
Even just tucking away £50 a month can be a really healthy habit. That’s £600 per year saved with surprisingly little effort. At the same time, you’re building momentum in your saving routine and confidence in how you handle your cash. This is how serious emergency funds get built – one brick at a time.
Keep up the good habits
As we already said, your saving power is going to depend very much on your personal circumstances. With an income nudging up toward £30,000 a year, you’re going to find a few more savings and investment options opening up.
Let’s assume you’re already keeping up a few of the good habits we’ve already mentioned. You’re getting your essentials paid, your debts are under control and you’re saving regularly. Now’s the time to take a second look at that 50/30/20 rule we talked about. If you get this thing up and running, it’ll help you steer clear of overspending, make sure your critical costs are met and keep a steady flow of cash into your savings – and here’s where things get “interesting”.
If you put those savings into a standard savings account, you’ll be protecting them through the Financial Services Compensation Scheme (FSCS). Basically, every eligible person is covered up to £85,000 per bank, building society or credit union they’re saving into. On top of that, as we already said, savings accounts like this can allow you to get your hands on your cash in a hurry. This makes them a great place to stash money you might need soon for major purchases like a house deposit.
The downside to savings accounts is that they don’t pay out a lot when interest rates are low. Worse still, when there’s high inflation at the same time the money in your account gradually gets less valuable. Suppose, for instance, you’re getting 2% interest a year on your savings, but the rate of inflation is 4%. Over a year, your money’s actually gone down in value by 2%.
So, what other options are out there? Well, you could start looking into stocks and shares, for one thing. These can come with better interest than a basic savings account, but they come with some pretty tangled strings attached. Investments like this carry some risk along with them, so they’re not a sure bet for building up your cash. That’s why they always come out of the 20% of your income you’ve set aside for them, keeping the cash that’s going toward your essential living costs safe.
Have realistic expectations
However much you’re earning, the chunk of it you set aside for investments each year needs to be based on realistic expectations and goals. Having a savings target to aim for is great for motivation, but you’ll need to make a plan and stick to it to get there.
Okay, at £50,000 a year, you’re probably a little less handcuffed by your basic living expenses than you used to be. If your costs aren’t keeping up with your income, you’re going to have more savings cash to play with.
Your take-home at this point comes to £37,662 once you’ve paid out your Income Tax and National Insurance Contributions. That works out to about £3,139 each month. Using our 50/30/20 rule, this gives you £627.80 a month for savings and investments.
So, you’ve got your emergency fund nicely padded out with 6-12 months’ worth of spending cash. Now it’s time to take stock of your opportunities. You want to make the most of your money, obviously, but you’ve got to go into it with your eyes wide open. We’ve already talked a bit about risk, so now you’ve got to decide where the lines are drawn for you.
If you like to play things nice and safe, you’re probably going to have to make do with a lower “rate of return” on your invested money. That, in turn, will probably mean you end up pouring more money into the investments you choose. Stocks can be notoriously risky, but they aren’t your only option here. You might decide to vary things up a bit by throwing a few less volatile investments into the mix. Strap in here, because this is where things get a bit technical:
An “index fund” is a kind of collective investment that tracks a specific “market index” (kind of a cross-section of how a particular market is moving). The money you invest is spread out over a number of companies, as a way of bringing down the overall risk.
Once you get the idea of “diversifying” the investments you’re putting your savings into (basically, not dumping all your nest-eggs in one basket), you can go even further. You can diversify into different countries, for instance. You could also look into “emerging market index funds”, which are often seen a more dangerous investment since the economies they’re grounded in can be more volatile. As always, you decide up-front how much risk you want to take, and how much cash you want to risk. There are no guarantees, which is why you’re only using money specifically drawn from that 20% “savings” chunk of your income.
So that’s the high-risk, high-reward world of stocks in a nutshell. Honestly, this kind of thing is sort of a young saver’s game. As you get closer to your Golden Years, you’re probably going to want to play a little safer. In generally, that’s probably going to mean pulling your cash out of stocks and loading it into something like bonds instead.
A bond is a kind of “fixed term” investment. They’re like loans you make to a business, or even a government. You lend your money out in return for regular payments, at a pre-agreed interest rate. This means they’re generally safer than stocks, even if they don’t necessarily have the same pay-out potential. Once the fixed term of your bond expires (or “matures”) it’s paid back to you. Obviously, this isn’t a game to play with money you need at short notice. The smarter move is to work out when you’re likely to need the cash (at retirement, for instance), and work out your fixed terms from there.
A word to the wise here: “safer” isn’t the same as “safe”. Always remember that you’re still taking a risk when you invest in a bond. If the business you invest in goes bankrupt, for instance, you might have to wait a while until you get your money back. Depending on the situation, you might not even get back everything you’re owed.
It's about you
Getting into good savings habits is one of the most important steps in making the most of your money. The 50/30/20 rule is really just the start of it, and as your income rises your choices get wider and harder. Don’t trick yourself into thinking that low-level, regular saving doesn’t matter. You’re playing the long game here, and it really does add up over time. Set a goal, make a plan and take it step by step until you get there.
Keep checking back here for more money tips and updates. We’re experts at saving you cash and we’re always here to help. That’s the reason why you’re better off with RIFT.
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