World Savings Day – there’s no better time to start

Saving is often considered the most basic financial habit.

It’s meant to be the first step in personal finance – something that comes before investing or buying property. Yet, over a fifth have less than £1,000 set aside.

There’s always something new to buy which isn’t helped with constant advertisement on social media and TV. Coupled with the recent rise in living costs over the last few years, it’s no wonder saving is so challenging.

Part of the problem is how our brains are wired. Studies show that spending triggers the same reward centres as sugar or caffeine. We make all sorts of excuses to justify the splurge – “I’ll save next month”, “I’ll be earning more soon”, “I deserve a treat!” Sound familiar?

The key to getting past this is tackling your finances head on – your incomings, your outgoings and how much that leaves you left with to save. 

This first step can be really hard, especially if you find money to be a stressful topic.

But if you bite the bullet, you’ll be rewarded with more money confidence and the clarity to make a savings plan to suit your goals.

The saving myth

“But life will be boring. I’ll never go out. I’ll have no life!” 

Think of that one friend who seems to do everything – activities, meals out, weekends away – and then out of the blue, they surprise you with an impressive savings pot. 

Chances are, they just know how to save smart.

The first step to smarter saving

First, it’s important to track your spending habits. Keep receipts and group your expenses – most online banking apps to the legwork for you these days. Don’t allow any expense to escape this audit, as even if the amounts look small or miscellaneous, they can seriously add up over the course of a month. 

Take your morning coffee, for example. At £3.50 every weekday morning, that’s £17.50 a week, £70 a month, or £840 a year – enough to seriously boost your savings. 

After tracking your spending habits, the next step is to set a realistic savings goal. If you’re willing to swap the takeout coffee for a home brew, start with that one change to your morning routine. Track your spending and the savings will take care of themselves. 

The personal savings allowance 

Once saving starts to become more routine, you can start maximising savings growth and protecting your savings from tax. 

The government will allow you to earn tax-free interest on your savings, up to a limit. This is called the personal savings allowance (PSA). 

Basic-rate taxpayers can earn up to £1,000 of interest before they need to pay a tax. Higher-rate taxpayers hit the limit sooner at £500 and additional-rate taxpayers lose the allowance entirely. The tax you owe depends on your marginal tax rate i.e. 20%, 40% or 45%.

ISAs

If you anticipate earning interest over and above your personal allowance, the most common move is to stick the savings in an individual savings account (ISA). The interest generated on savings in an ISA are completely tax-exempt. Cash ISA accounts can take deposits of up to £20,000 each year. A Junior ISA for children has an allowance of £9,000 each year. 

Choosing an ISA savings account

Almost a quarter (23%) of savers don’t check the interest rate before opening an account, which means many people miss out on the most competitive rates.

If you’re confident that you won’t need to access your money, a fixed-rate savings account will lock up your funds in exchange for a higher interest rate. The longer your funds are restricted, the higher the rate tends to be. But if you think you might need to dip into the money, an easy access savings account might be more suitable.

Read more: Should I save or invest?

Start your savings journey 

Charles Stanley’s savings rates: