Set yourself a savings goal

11 June 2015

Successful saving is arguably a lot like exercise - no pain, no gain. As is the case when undertaking a new fitness regime, if you properly commit yourself and stick to it, the long-term rewards can be great.

Typically, we always manage to save - and indeed exercise - that bit harder when we have a goal in mind. Generally speaking, savers are spurred on by the desire to drum up the cash for the likes of a new car, a wedding, that dream holiday or even a new home.

According to the UK's state-owned bank, National Savings & Investments, people who set a savings goal save faster and up to £550 a year more than those who do not.

But even when you have no endgame to speak of, it is still highly recommended to adopt a mindset that gets you saving every month anyway.

If you do not have a goal, think seriously about making saving for its own sake your target. After all, no one has ever complained about having too much in the bank. In fact, a survey from retirement specialist Partnership found that not saving enough topped the financial regrets of the UK's 40- to 70-year-olds.

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Squirrel away

Of course, the prospect of saving and getting into a firm habit can seem daunting, especially if you already feel that your finances are stretched. Household expenses and everyday spending will invariably put pressure on both savers and would-be savers.

But there are plenty of everyday adjustments you can make that could have significant impact on your coffers.

The trick to remember is the more you squirrel away, the more you will enjoy and exploit the impact of compound interest - whereby as your savings grow, the interest paid will rise as your nest egg increases in value.

For example, if you saved just £50 a month for five years at a rate of 3% gross interest, you would end up with a savings pot worth £3,237. After a decade, it would rise to almost £7,000. If you could squirrel away £100 a month, after five years you would have £6,474 - or just shy of £14,000 after 10 years. Save £200 a month for 10 years and your total would swell to nearly £28,000.

But while the thought of having a large savings pot at your disposal is naturally attractive, the difficulty lies in getting started and keeping it up.

Of course, before you embark on a savings plan, ensure you pay-off any debts such as personal loans and credit cards - as the interest you pay on those will be far higher than the rate of return from any savings account.

When getting started, the key is to track those everyday expenses and analyse your monthly costs - see where you can perhaps find some areas to cut back on.

Anna Bowles, director of independent savings advice site, says: "Unless you are lucky enough to always have excess left in your bank account each month, the first thing to do is to draw up a budget to see how much you can sensibly afford to save each month.

"Then set up a direct debit from your bank account to come out at around the time you are paid - it can then become almost like another bill but one where you get all the money back at a later date."

If you are struggling to get into the habit, look at your typical monthly and indeed daily spend. For example, if you went without your daily latte at £2.50 a pop, five days a week, you would have an extra £50 a month to save.

Research from Fidelity Personal Investing highlights a number of lifestyle changes, which could seriously boost your finances, such as giving up smoking, where by casting aside the pernicious habit, the average smoker could save a massive £180.80 a month - that's £10,848 over five years.

Have you got a gym membership, which you rarely or possibly even never use? For someone wasting £80 a month, if they instead put this amount into a savings account they would have an extra £4,800 over five years. What about taking your lunch to work. By saving £5 a day, five days a week, you would save £100 a month.

Challenge yourself

Peter Chadborn, a director at independent financial advisory firm Plan Money, believes those looking to get off the saving starting blocks need to challenge themselves. He says: "Set yourself a percentage of your income. I reckon 10% is a good target.

"It needs to be something that is meaningful and feels worthwhile, otherwise it is not a challenge and you are subsequently more likely to give up because there is no sense of making a difference. If you do not challenge yourself, there is no sense of reward or satisfaction that you are achieving anything."

While there is no shortage of savings accounts on offer, the deals at your disposal can vary widely. While the UK's cost of living, or inflation, as measured by the consumer price index (CPI) has fallen to zero in 2015, it is unlikely to stay in the doldrums for a prolonged period of time, so ensure when looking for a savings account, you seek out the best rate of interest you can, as inflation can be the silent assassin of savings.

Bowes adds: "Overall, the rate of interest that you earn should be viewed as the cherry on the top - the real value comes with simply putting money aside on a regular basis. And the sooner you start the better, as the effect of compounding interest can really add to the overall return, especially over the longer term."

Bowes recommends that for those looking to get into the savings habit, so-called regular savings accounts are a good bet, as they provide the motivation for savers to remain disciplined. With these accounts, you have to put in monthly payments and there are often penalties for missing premiums or making withdrawals, so it helps you only to break the T&Cs if you absolutely have to.

Remember, too, to use your Isa allowance; after all, the allowance for the current tax year is £15,240, and all interest and gains are free from the clutches of the taxman.

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