Building a safety net

The information in this guide was last updated on 26/02/2014

Whether you’re putting some money aside for a rainy day, saving up for a special occasion or looking out for your long-term future, savings and investments can put you in control of your financial future. So how much can you save and what’s the best way to do it?

Why should you save?

Saving is a personal decision, and how much you save and when will depend on your goals. You might save for special occasions like holidays, birthdays and family events. Many people save for longer-term goals like retirement or for their children’s education. And having some emergency savings on hand can make a real difference if something unexpected happens, like redundancy, illness or when you have to pay for repairs to your home or car.

Can you afford to save?

Saving is a great idea if you have all your expenses covered each month, like bills, transport, food and entertainment, and you still have money left over. However – it may not be sensible to keep a savings account if it means running up an overdraft, or if you’re saving instead of paying off debts. This is because generally the amount you pay in interest may outweigh what you earn from your savings.

There may be a few exceptions such as student loans, which have very low interest rates and only need to be paid back when your earnings go over a certain threshold, or interest-free credit cards, which can help to control your debts without having to pay interest.


How much should you save?

If you’re able to save, it’s a good idea to create an emergency fund to cover you for periods where you may have no income. Remember to cover costs such as :

  • rent/mortgage
  • food
  • utilities.

A savings fund that can keep you going means you’re secure during a rough patch – it covers you should you lose your job or if you need to make an emergency purchase.

Planning your budget can help you to see how much money you have left after paying for your essential outgoings – then you can decide how much of that you want to save. Work out your spending with our budget planner.

What’s the best way to save?

This depends on your savings goals. Are you saving for something in the short term or are you looking for security when you retire? If you’re unsure or want help to assess the options, it's best to speak to a financial advisor.

Once you have a goal, you can work out whether you want to save for the short, medium or long term.

  • Short-term savings

If you want to put some money away for a short while, but think you might need to dip into it from time to time, try looking at instant-access savings accounts. Instant-access accounts allow you to withdraw money at any time without paying a penalty or losing interest.

  • Medium-term savings

You can put money in savings that require a longer commitment, such as a fixed-term or limited access savings account or bonds. In return for locking your money away, you’re likely to get higher rates of interest, but you may have to pay a penalty if you want to withdraw money during the term.

  • Long-term savings

Saving for the long term can also be bolstered by investments like bonds or shares. If you can commit to an investment for at least 6-10 years and understand the risks involved (that you may lose some or all of your money) investments have the potential for both capital growth and residual interest. 

Jargon buster

What's compound interest?

Compound interest means the longer you leave your savings, the more you’ll earn. It really rewards you for leaving savings alone and not dipping into them.

As an example, imagine you put £100 into a savings account which earns 1% interest per year.

  • After the 1st year, you’ll have £101 (£1 earned).
  • After the 2nd year, you’ll have £102.01 (£1.01 earned).
  • After the 3rd year, you’ll have £103.03 (£1.02 earned).

You’ll see that you’re getting more each year. That’s because the 1% interest is now being earned on past interest (but remember, the amount you earn will also be subject to taxation).


Why choose an ISA?

ISAs allow you to save a certain amount of money each tax year without having to pay income tax or capital gains tax on what it earns. Stocks and shares and cash ISAs are available. For more on ISAs see our guide to tax-free savings.

How do I keep up the savings habit?

Even if you know why and how you’re going to save, it can still be a challenge to keep up with saving. Here are three ways to keep saving when the temptation to spend is strong.

  • Have a savings goal – It’s been shown that having a target helps people to save. So it may be worth having a monthly amount of money you want to save and aim for it.
  • Set up a regular payment – Every month, you can automatically send money from your current account to your savings account. That way, you don’t even have to think about it.
  • Understand your own attitude towards risk – It may be best to avoid picking investment products that you’re uncomfortable with. If you do invest in shares and bonds, make sure you’re happy to accept the risk involved.  The value of your investment can go down as well as up so you may get back less than you originally invested.