Have you tried walking on stilts? It’s a balancing act through and through.
So is saving and living comfortably enough. Not easy to achieve, but once you get into the rhythm and learn to adjust your balance, it becomes doable. Very much like the made to measure approach to saving proposed in “Build a Savings Plan That Fits Your Real Life“, an article I tweeted last week and which has been re-tweeted a fair few times since.
Saving is like dieting. If the diet doesn’t suit your lifestyle and/or you are not willing to change your lifestyle to meet the diet’s requirements, you won’t stick to it. Set your savings goals too high and you’ll get discouraged when you can’t save that much; set them too low and you’re undercutting your future prospects. Either way, you won’t achieve your goal: be it weight or account size. So how do you do that?
As the Money article advocates, you need made to measure solutions that fit YOU and YOUR life. Save less when there are more pressing needs, save more when there aren’t or you can reduce your monthly expenses.
Apparently, this strikes a chord. In principle, I agree that savings should dovetail living expenses and earnings. And frankly, you will also need to budget in a few treats and rewards. Unfortunately, a few setbacks and unplanned outflows, too.
But, you know what, that’s the easy bit. The magic ingredient is willpower to push through. The reality is that even if you flex your savings amount (by month, by year, by stage in your life), you still need the commitment to stick to your revised targets and to review your position at every wage raise or life change. It’s all too easy to increase expenses as you start earning more – after all you want to live your life and enjoy the rewards for your hard work.
So here are a few tips on how to stay on track:
Build an Emergency Fund
Start as soon as possible, ideally with the first pay check. Get it to at least 3-4 months normal expenses, which probably means you can stretch it to 5-6 if you cut back to essentials.
Top tip: Reward yourself when you’ve achieved this!
Stick most of that money in a cash ISA or a higher rate bank account that allows immediate withdrawal. Do not be lazy and leave it all in a checking account: Why forego interest income?
Don’t forget to top up in line with your expenses!!! You should review your position at least annually, but don’t overdo it: you need a reasonably steady target so you can actually achieve it.
Top tip: If you earn good interest, it may be easier to top up the fund than you think.
Avoid withdrawals unless it is a real emergency. Try to pay unexpected bills by reallocating or time-sequencing monthly expenses before you even think of withdrawing from the fund. Find out if you can spread payments. Transfer a balance to another credit card and repay a large purchase in instalments. Basically, think creatively before you act.
Set your Savings Target
Set a few different savings targets so it’s easier to measure progress. Some big items to go on the list:
- Property deposit: And don’t go for the minimum 10% but at least 15% to factor in taxes, purchase costs, moving expenses, renovation works and new furniture … plus all sorts of small things that you never put in the original budget.
- Education fees: For you, for your kids. Either way, you’ll need to cover at least a third from savings, possibly more. But if it is for the kids, then a sensible approach would be to save about a third, plan on getting scholarships or bursaries for a third and leave a third to be funded at the time.
- Retirement: There are so many variables here, that it’s easily the hardest to plan for. But one thing’s for certain: you cannot rely solely on politicians to take care of you. In fact you should probably view any state pension as icing on the cake you bake yourself.
Top tip: Don’t bite of more than you can chew. Break down each target into smaller goals with deadlines, so you can measure progress and get that all-empowering sense of achievement when you have reached a milestone.
Lets say you want to save £50,000 over five years. You may want to start with £5,000 in year 1, bump that up to £7,500 the following year and keep increasing the annual goal until you get there. Hopefully your earnings will rise over that period of time and the increases won’t feel too burdensome.
Prioritise but don’t get hung up on doing things just because others do them.
It’s not the end of the world if you don’t buy a property, but you certainly don’t want to run out of money in retirement. Home ownership is great, but realistically you need quite a few years of good earnings to be sufficiently financially stable to afford what you really want.
Top Tip: Early on, you should be more focused on investing in yourself, your career and your knowledge base, because that will underpin future earnings. It’s easier to save more, when you earn more!
Flex savings based on the stage in your life, BUT when things change – pay rise, baby on the way, downsizing, etc. – adjust BOTH the expense budget and the savings allocation.
Top tip: Crucially, don’t forget to increase savings when your income increases!!!
As with the Emergency Fund, maximise the impact of your saving and avoid tapping the pot until you’ve exhausted reasonable alternatives such as cutting back on non-essential expenses, spreading out costs for large items and reconsidering the bigger picture. Compound interest, reinvested dividends and capital growth work wonders over time.
Top tip: If you come into money, sell something pre-loved or start earning a second income, try to allocate most if not all of the extra money toward paying down debt and savings rather than increasing the monthly expense budget. Do treat yourself, but think longer term, too.
Top tip: Don’t let money lie idle in a bank account that earns you nothing in real terms. Factor in inflation and at least go for higher interest savings or deposit accounts. Better still, invest in stocks and bonds. There are great tax advantages to using ISAs and SIPPs and, if you have accumulated a bigger savings pot, investing in small businesses through VCTs, EIS and SEIS schemes.
Manage your Financial Existence
Manage your debt position, but don’t do it completely at the expense of saving. Rather, pay off expensive debt and shift as much as possible to lower-interest debt. Consider how much interest you would need to pay on the debt and how much you can earn by saving or investing the same amount of money.
Top tip: Use unexpected windfalls to bring debt down, especially if you are coming up to a big life event, particularly retirement. You don’t want to use up all your savings towards paying down one debt only to have to take out another to fund the next big thing in your life!
Don’t be overreliant on others to manage your finances for you.
Do get help if you feel you need it!
Do discuss financial health with your partner, share and act jointly!
But also invest in your own knowledge and ability to manage your life should things not go to plan. It starts with knowing things such as the passwords to the bank accounts, what insurance policies you have and which pension schemes you’re a part of.
Top tip: Do a financial health check at the start of each year. Go through what you’ve achieved and review your targets, so you can rebalance priorities accordingly. Ultimately, you can’t tailor your savings plan if you don’t take realistic measure of your life and where you want to go.
And, if you need support, check out our Personal Finance Courses.
Perhaps, start with our Financial Confidence Survey.