Moneywise's 10 golden rules of saving
1. Write a budget
Only when you know exactly how much money you have coming in and going out on a monthly basis can you work out how much you can afford to put in a savings account. Be realistic - commit to save too much and you'll end up busting your budget and going overdrawn.
2. Free up more spare cash
Go through your budget and see if they are any regular expenses that can be trimmed or scrapped altogether. Do you really need that mobile phone insurance, could you get a better deal on your home or car cover, are you spending too much at the supermarket? Once you have a budget it's easy to see what areas of your spending can be cut.
Watch our Moneywise TV episode: Cut your weekly outgoings in a flash
3. Save at the start of the month, not the end
If you just save whatever you have at the end of the month you'll invariably save very little. Instead, set up a standing order for a fixed sum to be transferred from your current account into your savings account the day after pay day. That way you'll have no opportunity to spend it and you'll quickly get used to the money going and manage to live within your new budget.
Watch our TV episode on how to choose a savings account
4. Make the most of your ISA allowance
Each year you can save up to £5,100 a year in a cash individual savings account where all interest is paid tax-free. If you have a non-ISA savings account paying 3%, that rate is effectively reduced to 2.4% for basic rate taxpayers and 1.8% for those that pay the higher rate.
For the best current deals on offer check out our best cash ISA rates article
5. Review your savings accounts once a year
Just because your savings account was at the top of the best buy tables when you opened it, it probably isn't now. Banks reduce the rates on savings accounts over time, particularly once they are closed to new customers and replaced with better deals.
So, if you've had your account a few years or more there's a good chance it's paying less than 1%. Check out the Moneywise savings and cash ISA round-ups which provide you with all the details of the best accounts.
6. Don't fritter away your cash
Think about how much you spend in a typical working day - £1 for a newspaper, £2 for a coffee, £4 for lunch - the money quickly racks up. Keep a money diary detailing everything you spend for a week and you'll quickly identify your spending weak spots.
7. Don't save if you have debts
Saving feels good - but there's absolutely no point ploughing your spare cash into an account paying 1,2 or even 3% if you've got a big credit card bill that's racking up interest of around 20% a year. It's sensible to have some money in an emergency fund but try not to prioritise building this over clearing your debts.
8. Fix if you can afford to
If you can afford to tie your money up for a year or more it often makes sense to plump for a fixed rate account. Fixed rate accounts typically pay a higher interest rate (the longer the term, the higher the rate) and as penalties for withdrawing your cash are steep, there's no temptation to raid your account.
The potential downside is that if bank base rates rise you may find your account looks less attractive and you can't access your cash and switch. You can avoid this by sticking with short-term fixes.
9. Don't sit on piles of cash
It's important that you have some money you can access in a hurry - experts suggest around six months salary in a no-notice account. However it doesn't always make sense to keep all your money in cash accounts. If you have at least five years before you'll need your money then it's worth considering investing, especially when interest rates are low.
One option is to transfer an existing cash ISA into a stocks and shares ISA or you can start by investing a small sum each month into a well managed investment fund - again within the ISA wrapper to ensure you don't pay any tax. The danger with investing is that the value of your investment could fall, but if time is on your side you should be able to ride out any volatility and end up with a higher return than you would have got if you stuck with a cash account.
Check out our investment pages to find how to get started and get our tips on the right funds for you.
10. Don't forget your retirement
We all save for a rainy day - but what exactly constitutes a rainy day? It's probably the day your car or boiler breaks down or the day you fall sick or lose your job. But the day your retire could also fall into this category if you haven't made preparations. According to recent research from Defaqto, only 40% of Brits are currently saving for retirement.
The easiest option is to join your employers scheme or, if that's not an option consider taking out a simple stakeholder pension. Although pensions have suffered a hard press they are very tax efficient. Tax relief at 20% means it only costs basic rate tax payers £80 to invest £100, while higher rate taxpayers get tax relief at 40% meaning a £100 investment only costs £60.
Check out our pension pages to help you make the right retirement choices.
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
A savings account on which the account holder is required to give a period of notice before making a withdrawal or face a penalty, usually a loss of a specific number of days’ interest or pay a fee. Notice periods of 30, 60 or 90 days are common. These accounts usually pay higher than average interest rates and require large initial deposits (£1,000 minimum) so the notice period and penalties are there to discourage withdrawals. Some of these accounts will only allow a certain number of withdrawals a year.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.