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What is saving?
When we talk about saving, we’re referring to putting your money away into a different bank to your main spending account so you can grow your wealth and have money available for your bigger, more long-term goals.
This is usually done through a cash savings account that lets you access your money fast, usually immediately or within one working day. The idea is you keep this money separate and don’t spend it month to month, all so that you have a pot to cover any unexpected costs or to cover purchases outside of your day-to-day spending, such as a new car or holiday.
You could also save money by putting it into an investment account or pension account. The thinking behind it is the same in that you are putting money aside so you can build a bigger pot to spend in the future, but the difference between saving in investments vs a cash savings account is that it’s not as accessible and therefore should be used for goals that you have for your more long-term future (usually ones that are more than 5 years away).
Why is saving money important?
Saving money is great money practice. It’s beneficial for you and your money to get into the habit of it. Outside of it being a good thing to do financially, it can kick-start a positive cycle of financial wellbeing too. In the same way that poor financial habits negatively impact your mental health, starting a savings habit can do the opposite.
You can view it as ‘paying your future-self’, hanging on to your money, or as a way to prepare for the unexpected. No matter how you approach it, saving money is a good idea because it’s a good feeling. It will either set you up to be able to afford some bigger purchases, or it can act as a ‘safety net’ to protect you for when life happens.
What is a cash safety net?
A cash safety net is money that’s set aside so you can handle unexpected costs. It could be unemployment, a broken car or poor health, but having a cash safety net means you’re able to give yourself a level of protection against whatever life throws at you. You can navigate your way through the future much more confidently knowing that you have cash to lean on.
A good cash safety net is usually 3 months’ worth of monthly expenses held as easy-access cash. Your monthly expenses include anything you need to live and payments you need to make like rent, bills, your car finance payment and food. Easy-access cash is money that you can, you guessed it, access easily from your account. Some savings accounts will offer higher interest rates, but with the condition that your money has to be saved for a certain amount of time, and can’t withdraw quickly. Be sure to double-check the terms on savings accounts before you put money in there. Although higher interest rates may be attractive, not having access to your money when you need it most is more important when it comes to a cash safety net.
To work out what you need in your cash safety net, work out how much your essentials cost you each month. Then, multiply that by 3 months, and you’ve got what you should aim for as your cash safety net. You can have as much or as little as you like as your cash safety net but having 3 months' worth of costs will puts you in a strong position with your money.
How much should I save each month?
There isn’t a set rule for what you need to put away every month because it needs to be based on what you can afford, but a general figure to aim for is between 10-20% of your total monthly salary. For example, if you're on a £30K salary, your monthly take home pay after tax would be around £2,000 (not including any deductions) and you should be aiming to save between £200-£400 each month.
In order to meet this target, you need to make sure you are budgeting properly across all areas of your finances. We do have another guide that talks through the wonders of good budgeting so give that a read if you’re interested, but here’s a visual representation of how it could work in practice...
Even though that’s a good place to start, you might decide you want to put away more or less, and that’s absolutely fine – it really is dependent on your own personal circumstances and the lifestyle you want to lead. The most important thing for everyone is to build a cash safety net to make sure you’re prepared for any unexpected financial difficulties, so make that your first goal and from there the world is your oyster.
Is there a limit on what I should save?
Generally speaking, the more you can save, the better – so, no, there’s no limit on how much money you should keep aside. However, it is important you’re aware of the different places to keep your money, because with inflation rising at the rate it is currently, you might want to consider splitting your savings between cash savings accounts and investment accounts, so you can make the money you have work harder for you.
Savings accounts are a brilliant, risk free way of putting money aside. They allow you quick and easy access to your money and also usually pay you a higher interest rate than your main spending account, as a thank you from the bank for keeping your money with them. However, the interest you get is almost always less than the rate of inflation, so when you’ve got more than your cash safety net saved up, you might want to think about starting to invest as a second form of saving for the future.
Investing is when you invest your money in things like shares in companies, with the hopes that you see a greater return than cash savings. The returns on investing can be higher than the returns from cash savings, but there is an element risk involved in keeping your money there because you’re not guaranteed to get back what you put in.
How do I know when to save and when to invest?
Having a cash safety net is the most important thing, so that should always come before starting to invest. If you already have a cash safety net saved up, then you can start to think about your other future financial goals and decide whether to invest based on that.
The general idea is you should keep your savings in cash if you expect to use that money in the next five years because it will protect your money from the fluctuations you can see when investing. So, if you’re saving for a new car, a wedding or even a baby and need that money within the next 5 years, you’re better off keeping your money in a cash savings account.
You should also keep your money as cash savings if you are uncomfortable taking risk or can’t afford a loss in the value of your money.
If you are comfortable taking risk and you are saving for the medium to long-term, investing is a good option as the return on investing can be higher than that of cash savings, however this is not guaranteed. Whenever you’re investing, you could come out with less than you put in, so you need to be comfortable with that. However, over time stock markets have risen and the longer you invest, the more chance you have of making a positive return, which is why it’s worth thinking about if you’re saving for the future, e.g. your retirement.
If you’re interested in starting to invest, you can read more in our starting to invest guide.
What is the 52 week saving challenge?
Starting small with £1 a week, the 52-week savings challenge builds up how much you put away every week by £1 so you can save approximately £1,378 in a year. Like the couch to 5k running challenge, this is a great way to gradually increase your confidence with saving and get some results.
This challenge can be testing once you get into the back-end of the year as you’ll be saving over £200 in your final four weeks vs £10 in your first 4 weeks, but the aim is to ease you into the habit. You could split it equally over the 52 weeks so that you’re not shocked at the amount you need to save at the end. These challenges can be flexible, but sometimes it’s good to have structure and a goal to stick to.
If this doesn’t sound like your thing, there are many other tips, tricks and ways to save and get into the healthy habit of saving. Check out our other blogs on saving for more inspo.
How can the OpenMoney app help me to save?
Saving money each month is always easier said than done. We’re here to help you find out the best ways you can save, and we have a handy app that can help you do just that. We’ve created our app to help people save money, get out of debt and stay on top of their day-to-day spending.
The most important first step to do when wondering about how you can save more each month is to have a look at all of your accounts. Our app allows you to connect any kind of account: current accounts, credit card accounts, pensions, ISAs, savings accounts and more. It helps to have a clear overview of what’s going on with your money by viewing it altogether in one place. So from here, you’re in the best position to understand how everything looks for you and your money as a whole.
Delving into your money situation can be daunting, but the best way to improve a situation is to learn about it! Our app helps to make that process as simple and as easy as possible.
Next we’d ask you to confirm your committed spends (rent, bills and subscriptions ) so we can figure out how much disposable income you have to spend on the things you love. After you’ve confirmed your committed monthly outgoings, you’ll have an idea of how much money you have leftover each month. It’s up to you to decide how much of that you’d like to save. We also offer the ability to switch providers for your bills like electricity and gas to save more money each month and get you that little bit closer to your goal. Every penny counts!
Then it comes down to the budget. It’s simple, but effective. Our app helps you to categorise your spends, so you can create a budget that works for you and your current spending habits. You can set mini-budgets for specific categories, such as £150/month on groceries, which contribute to an overall monthly budget for you to stick to. We’ll let you know if you’re due to go over on any of them.
