How much should you be saving?

Everyone knows the importance of saving money, but how much should you be putting away every week, month or year?

The truth is, there is no fixed amount that you should be saving, just as long as you are saving something. The most valuable thing you can do is to simply be consistent with your saving habits – decide how much money you can afford to put away, and do not touch it until you have reached your savings goal, whatever that may be.

However, it can be useful to approach your savings with some structure.

Create an emergency fund

First and foremost, you should aim to build up an emergency fund. This is the money that will tide you over if you are unable to earn for a while or money that can be used to cover an unexpected bill. Aim to save the equivalent of three months’ expenses in your emergency savings pot, then just leave it in an easy access cash savings account. If you ever need to make a withdrawal from the fund, make sure you top it back up again as quickly as possible.

Set up a pension fund

Think of this as your long-term savings plan, rather than a pension fund. With the average age of retirement rising, saving for a pension fund can feel like a very distant priority, but the reality is that the sooner you start putting money aside for your retirement, the more wealth you can build. Most governments have incentives in place to help people save towards their pension, so you can make your money go further by using tax-free wrappers and deferred pension payments.

Once you have set up your pension fund, work out how much you can afford to put into it each month, then simply set up a direct debit for that amount.

Create savings goals

Saving money is pointless unless you are saving towards something. Set goals for your money – big and small. Maybe you want to treat yourself to a vintage motorbike, but you also want to build up a retirement fund, and you also need to pay school fees for your child. That’s three savings goals right there, of varying sizes, which will help keep you on track.

Protect your financial freedom

When you are saving money, you should take a few steps to protect yourself and your money. Never keep your savings in a joint account, as there is always a risk that your partner could overspend or even use that money to exert financial control. Savings should always be ringfenced in a dedicated savings account, not a current account, to avoid the risk of debit card fraud or overspending.

Follow the 70:20:10 rule

The 70:20:10 rule is a popular money management formula, which tells you how to handle your take-home pay to maximise your savings. It suggests that 70 per cent of your income after tax should be spent on your living expenses. This includes rent or mortgage payments, bills, groceries, clothing, and any social activities. The next 20% should be saved or invested, and the remaining 10% should be used to either pay down your debts or make donations to good causes.

Naturally you can adapt this formula to meet your financial goals. The lower your living expenses, the more you can invest. If you don’t have any debt to service, you can increase your investments to 30%. Your journey to financial independence can be shortened or lengthened based on how much you contribute to the middle part of this formula.

Revisiting your savings plan

Over time, your financial situation will change. You may get a promotion and start earning more, you might inherit some money, or you could find yourself without work and unable to maintain your previous earning power. Or the cost of living may rise to a point where you are spending more money than ever before on your day-to-day essentials, and unable to save as much money as before. Life is unpredictable and we need to be able to adapt to a changing financial position. Check in with your finances once a quarter and don’t be afraid to tweak your household budget or savings plans accordingly.

Just keep saving

Consistency is the key to building good savings habits and allowing your savings fund to increase. Over time, your savings will continue to grow, and you will start to see the fruits of your labour.

Saving just £100 per month will add up to £1,200 per year, before any interest payments have been factored in. After ten years of saving £1,200 per year at an average interest rate of four per cent per annum, you will have accumulated almost £15,000. When you roll your interest payments back into your savings pot, you can start to see results really quickly. However, once you start withdrawing money from your savings pool, you can undo a lot of this progress.

In short, it doesn’t matter how much you are able to save, what matters is that you start saving, keep saving, and don’t touch your savings unless you absolutely must. Do this, and you will start to build wealth without even realising it.