A Fitness Test for your Savings
I suspect like a lot of the UK population, you have made some New Year resolutions about getting fit and losing a few pounds. These resolutions normally do not last past the beginning of February, so try something different; gain a few pounds, (in the purse or wallet), and ignore the diet!
Everyone needs some savings; borrowing money to meet emergencies is expensive, hard work and precarious.
Think of saving as four pots; emergency, holiday, next car and pension.
As a golden rule, do not spend up to your income, set some aside for later and spread it across your savings pots.
Emergency; fill this first. In an easy access bank account, probably paying minimal interest but away from your main current account, so you have to put yourself out to spend it. As much as you can afford, three months net pay or more, so you can deal with a disaster as big as getting sacked, (assuming you are expecting to get more work after a month or so). Once filled, start putting money into the other pots.
Holiday; in a notice account, 30 to 90 days, so you get higher interest, to save enough money for the next annual holiday. Ideally, take the likely cost of your next holiday and divide by 10 to get the amount for the standing order from your current account to this one. (That leaves you a one-month payment holiday to go on the break and one month to plan it!).
Next Car; or some other larger goal more than two or more years away. In another notice account, probably 90 days if the target is less than 2 years away, or a stocks and shares ISA if the goal is further away. Again, set up a standing order, so the money does not remain in your current account where you can spend it without noticing.
Pension; If your employer has an occupational pension scheme, then join it. In the early stages, try to put in as much as necessary to maximise your employer’s contributions. If you can afford more, then don’t let me talk you out of it; as a target income, think of at least 50% of current salary, which would need a fund of about 20 times that. Remember though, once money has gone in here, you cannot get to it without retiring, (so at least older than 55). Like eating an elephant, you will not manage it in one sitting; this is a task for the whole of your working life. Assuming you have more than 10 years to retirement, your funds should be in predominantly equity accounts, but less than 10 years to retirement it depends on whether you are going to use an annuity or not.
Fit or not?; although you can save just for the fun of it, it is usually easier if you have a specific outcome. The hardest pots to set goals for are the pension and the emergency pots, as these are moving targets; hopefully your salary will rise over time, so 50% of salary will go up and the total fund needs to be 20 times the annual income figure; 3 months net salary should rise as well, so the key here is to review your targets annually. For the other two pots the outcome should be clear – will your current monthly saving be enough to meet your targets when their time comes up?
Contact me with queries
If anyone is looking for general advice, then please write in to the blog and I would be happy to help with anonymous advice posted here. Alternatively, please call us on 0116 253 5600 and ask to speak to an IFA, (Independent Financial Adviser), for a no-obligation discussion.
If you know you need formal advice, have a look at http://bankfield.net/personal/savings-investment/, or ask around for a recommendation, it might even be me.