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Can I afford to save and how much?
Can I afford to save and how much?
Before you start saving, it’s important to take a good look at your finances.
You need to have a good understanding of your financial situation to work out how much spare money you have to save or invest.
There are four main things you need to look at to understand your finances:
- Your debts. You need to make sure you’ve cleared any debts before you start saving because any interest you earn on your savings will be wiped out by the interest you owe on your debts.
- Your budget. It’s essential to have an accurate picture of exactly how much you spend over the year, to find out if you can release any extra money to put into savings.
- Your plans for retirement. Saving through a pension can be a very efficient way to save for the future. You might want to consider whether you should put some of your money directly into a pension plan rather than into savings or investments.
- Are you financially protected against death and serious illness. You need to look how you or your family would manage if you or your partner died or became seriously ill. If you don’t have much cash to spare, taking out insurance may be the best way to plan for this rather than saving.
If you’re in debt, you should use any spare cash to pay off your debts before you think about saving.
If you’re behind with things like your mortgage, rent or council tax payments, you should pay these off first. These kinds of debt are called priority debts. Priority debts also include arrears of income tax, VAT, gas and electricity, your TV licence and court fines for things like traffic offences. If you don’t pay off debts like these, you can lose your home or even go to prison.
For more information about priority debts and how to deal with them, see Get help with your debts.
But even if you don’t have priority debts, you might want to think seriously about clearing any non-priority debts such as credit card debts and non-secured personal loans with your spare cash, before you start saving anything.
This is because the interest you are paying on most non-secured personal loans and credit cards will be far higher than the interest you may be earning on a savings account.
A non-secured loan is one which is not secured against your property. To find out more about secured and non-secured personal loans, see Personal loans.
You can find out more about when it might be cheaper to pay off credit card debts and personal loans than to save on the MoneySavingExpert website at: www.moneysavingexpert.com.
Look at your budget
The best way to see whether you’ve got any money to spare for savings is to work out how much you spend every month and compare it with the money you’ve got coming in. This is called your budget.
You should also look carefully at your spending to see if there is anything you can cut down on. This might make money available for you to put aside.
You can use our budgeting tool to help work out your budget.
Keep a note of what you spend
The best way to find out how much you spend is to buy a notebook and write down everything you spend for a month. Remember, you will not spend the same amount each week or month.
It’s always best to over-estimate the amount you spend and include everything, however small. Don’t forget to budget for annual expenses like holidays, birthdays and Christmas as well. Look through old utility bills, such as gas, electricity and phone bills, to work out how much you spend over the year.
Cutting down the cost of household bills
Now is a good time to check that you’re getting the best deal on your mortgage, phone, broadband, insurance or fuel costs. Finding a better deal could save you hundreds of pounds a year. Use a price comparison website to compare rates.
For England, Wales and Scotland, you can find a list of price comparison websites which have been approved by Ofgem at: www.ofgem.gov.uk.
Review your current and existing savings accounts
You should also review your current account and think about switching to one that pays interest if you know you are always going to be in credit. You usually have to pay in a minimum amount of around £1,000 a month to qualify for interest.
Look at any existing savings accounts and make sure you are getting the best rate you can. It may be worth switching to an account that pays higher interest.
You can shop around for a better deal on savings and current accounts on the following websites:
Set up direct debits
You can set up monthly direct debits to help you budget for your payments. Some suppliers such as gas and electricity companies offer customers a discount if they pay by direct debit or standing order.
However, make sure you keep track of how much is taken from your account. If you end up with too much money in your account or find that too much has been taken out, contact your supplier to find out why this has happened.
You can find more information about direct debits in How bank accounts work.
Online budget calculators
You can use an online budget calculator to help you work out how much money you can save.
You can find an online budget calculator to help you.
Take a look at your retirement plans
Before you divert money into savings or investments, you should think about working out how much you will need to live on when you retire and decide whether you can afford to put some money into a pension.
Saving through a pension plan is one of the most efficient ways to save because all your contributions are tax free. It is also important to start saving into a pension as soon as you can because your pension fund will have more chance to grow and earn money. If you start your pension late, you will have to pay more expensive contributions to get a decent pension when you retire.
If you already have a pension, make sure it is on track to pay out the income you need and check whether you need to top up your contributions.
If you don’t have a pension, now might be the time to set one up if you have some spare money. The Money Advice Service website has a calculator that can help you work out how much you should be paying into a pension. Go to www.moneyadviceservice.org.uk.
There are several ways to save for retirement and there are many things you need to think about before you choose a pension plan. To find out more about pensions, see Pensions.
Are you financially protected against death and serious illness?
When you’re looking at your financial situation, you need to think carefully about how you or your family would manage if one of you died or became seriously ill.
If you don’t have much cash to spare, taking out insurance may be the best way to plan for this rather than saving.
One of the cheapest ways you can do this is to take out term life insurance. Term life insurance pays out if you die within a specific period of time (the term) that you've agreed with your insurance company. This could be for example, ten, fifteen or twenty years. If you live longer than the term, you get nothing. If you live as a couple and have a mortgage then both partners should think about taking out this insurance.
You may only need to pay a few pounds a month in premiums but it could give you a significant payout. This money could pay off a mortgage or provide a replacement income. However if you survive to the end of the term there is usually no pay out.
If you have a workplace, stakeholder or personal pension, you should check this first before looking into term life insurance to see what benefits it pays out.
Some pensions pay out a lump sum to your family if you die before you retire. In some cases, they also pay out if you die within a short time of retiring.
For more information about term life insurance and other types of life insurance, go to the Money Advice Service website at: www.moneyadviceservice.org.uk.
For more information about pensions, see Pensions.
There are other types of insurance which can give you an income if you lose your job or pay out a lump sum if you are diagnosed with certain illnesses.
To find out more about these types of insurance, go to the Money Advice Service website at: www.moneyadviceservice.org.uk.
Should you save or pay off your mortgage early?
If you’ve got cash to spare, you might want to think about using it to pay off your mortgage early, rather than putting it into a savings account. Some mortgages allow you to do this by paying extra each month.
Paying off your mortgage early could save you thousands of pounds in interest charges and might be more cost effective than saving the money.
However, there are some things you will need to think about.
Pay off other debts first
If you have other debts such as credit cards or personal loans, it’s a good idea to pay these off before you use any spare cash to pay off your mortgage. Mortgages are a cheap way of borrowing money compared with credit cards and personal loans so you should think about paying these off before either paying off your mortgage or saving money. See our section, Pay off your debts first for more about this.
Make sure you’ve got enough put by to cover emergencies
You may need money to cover an unexpected emergency such as illness, an accident or losing your job. If you are used to a reasonable income, you may find that state benefits isn’t enough to cover all your expenses. You may need to get at your money in a hurry and if all your money is tied up in your home, this might not be possible.
It’s a good idea to have some money put aside where you can get at it easily. This could be in an instant access account, credit union or cash ISA with the best interest rate you can find. There should be enough money in this account to cover three to six months’ living expenses.
If you can’t afford to save up for emergencies as well as pay off your mortgage early, you might want to re-think paying off your mortgage.
For more information about putting money aside to cover emergencies, see Why do I need to save?
Will you have to pay a penalty for repaying early
Check your mortgage agreement to see if you have to pay a penalty if you repay early.
You can find a useful calculator on MoneySavingExpert website which helps you work out whether it’s worth you paying off your mortgage. Go to www.moneysavingexpert.com.
How much should you save each month?
The amount you save will depend on how much you have to spare after you’ve worked out your budget.
You can use an online calculator to help you work out how much you should save each month if you are saving up for something specific. Go to the moneysavingexpert website at: www.moneysavingexpert.com.
If you know the amount of money you need for a savings goal, you can use an online savings calculator to work out how long it will take you to save at the interest rate paid on your savings. To find a calculator, try www.guardian.co.uk/money.
What if you can’t afford to save anything?
If you’ve worked out your budget, and found you’ve got more money going out than coming in or you don’t have any left over, you might not be able to afford to save anything. But there are several things you may be able to do.
Take another look at your budget
You should take another look at your spending to see if you can make any cutbacks. This might make money available for saving. There may be ways you can increase your income as well.
For more information about this, see how to save money on your bills.
If you’re really struggling to pay your bills, especially the more important ones like your mortgage, rent, council tax or gas and electricity, you should get help straight away from an experienced debt adviser. You may be at risk of being taken to court or losing your home.
A debt adviser can also help you look at ways of making spending cutbacks or increasing your income. They can help you make sure you’re not missing out on tax credits or state benefits that you you’re entitled to.
You can get debt advice from a Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by e-mail, click on nearest CAB.
If you’ve got a small amount to spare
If you can spare a few pounds here and there, you could think about putting them into an instant access savings account so that you can earn some interest. Choose an account that allows you to save as little as you like and where you don’t have to pay in regularly.
For more information about instant access savings accounts, see Bank and building society savings accounts.
Credit unions are also a good way to save if you can only afford to put a very small amount of money away. They also offer loans at very competitive rates but you usually have to be a regular saver. For more information about credit unions, see Credit Union loans.
Make sure emergencies are covered
If you’re getting benefits and you need money in an emergency, you may be able to get help for one-off expenses such as having a baby or furnishing a new home. For more information about this, see Extra help if you're on benefits or your benefits have stopped.
If you don’t have enough to save, see if you can find enough money to take out insurance which would cover you if you or your partner died or became seriously ill. See Why do I need to save? for more about this. You should also check any insurance policies you already have to see if they offer extra cover. For example, home contents policies may offer extra benefits like legal or accidental damage cover.