Everyone should be saving for their retirement to cover unexpected expenses, but are they? Find out what the average person in the UK is saving each month and what the experts recommend. Learn to calculate how much you could save each month, what to plan for and where to put that money to earn an efficient return. Learn how to create a personal investment plan.
Ever wondered: ‘how much should I save each month?’ or ‘how much of your salary should you save?’. Before saving, we need to know what we are capable of saving, where we could cut back on some of our expenses, and what those expenses are. This is where a budget comes in.
If you are thinking about saving but have lots of high-interest debt, most financial advisers recommend taking care of the debt first. Once that is paid off or reduced, start to focus on your savings.
Many people find it easier to save if they are saving for something and know what that something is. Consider making a list of what you want to save for. Ideally, this should include long and short-term savings goals, such as saving £1,000 a month.
Short-term goals may include:
Having the equivalent of three to six months of monthly income in a savings account in case income is disrupted or an emergency comes up – for example, getting a car repaired.
Putting money aside for a holiday. The costs of going on a trip can vary dramatically, so consider whether the total amount will be half a month’s or two months’ salary. Save accordingly.
Saving up to buy a car. Even if the car is financed, the more that is saved for a down payment, the less the monthly payments/debt will be.
A Christmas or birthday fund so you can routinely put aside some money to spend on gifts throughout the year.
A down payment on a house. Consider what type of house you want, and the cost. According to Bankrate, because of the financial uncertainty caused by the pandemic, more lenders in the UK are asking homebuyers to put down 15% of the purchase price. However, there is a government-backed scheme to help first-time buyers or current homeowners secure a mortgage with just a 5% deposit. Calculate what you will need for the house you’re thinking of buying.
Long-term goals may include:
Buying a foreign property, where you may need the full amount of the purchase price in cash.
University funds. Estimate how much university tuition fees will be when your child goes to university. Divide the amount by how many years it will be before they attend. That’s how much you will need per year. However, a little less than this amount may be fine since the saving, if invested, will be generating interest until the fund is used.
Paying off your mortgage.
Saving for retirement is the big one because unless we want to keep working, it’s our savings that will support us into old age.
Some experts recommend that you’ll need to save 25 times your annual expenses to become financially independent by retirement age, according to Money Under 30. The theory is that you can then withdraw 4% of your savings/investments to last you 30 years – adjusting for inflation.
For most people, this will require saving 10% to 30% of their salary, depending on age and other savings. The actual amount you need depends on how much you wish to spend in retirement and how long you live. A retirement calculator can help you figure out what you need to save. Keep in mind, the higher the return on your savings, the less you need to save each month/year.
But what if you don’t have much money to save each month? Don’t feel bad. Start out with what you can. Even a small amount each month could add up over time: £50 invested each month and earning 6%, which is less than long-term stock market return averages, could turn into more than £22,000 over 20 years.
The amount you save can then get allocated to your various goals. Some may be more immediate than others, so focus on those first. Based on your budget, calculate the amount you can afford – some financial advisers recommend that you initially save at least three to six months of savings – and then decide what percentage you will then allocate to each of your goals.
Remember, the earlier you start saving, the more compounding that occurs, especially if those retirement funds are invested and make a good return (more on that in the next section).
There are several ways that savings can be used or invested. Each option carries a different level of reward and risk.
These are low-risk options that offer substantially less profit potential than, for example, investing in stocks. Savings accounts or fixed-term deposit rates will often offer interest rates below the rate of inflation. That said, they will still generate compound interest, which will allow savings to grow over time.
Stock investing carries more risk than a savings account, but the potential rewards are higher. Here are some options for investing in stocks:
Stock index exchange-traded funds (ETFs). These ETFs track major stock indexes, such as the S&P 500 and FTSE 100. The long-term yearly average performance of these indices is 10% and 8%, respectively.
Dividend ETFs or stocks. Dividend stocks pay out cash to shareholders, typically monthly or quarterly. They provide a regular cash flow or dividends that can be reinvested in the stock to compound returns.
Growth stocks. This involves buying shares of companies that are steadily growing their earnings and revenues. As the business grows, so too – typically – will the stock price move higher.
Value stocks This is the process of buying stocks that are trading at an attractive valuation relative to the profit the company makes or to their net assets (asset minus liabilities).
Savings bonds are the middle ground between a savings account and investing in the stock market. A bond is a loan to a company or government. You lend them money, and they pay you a set amount each year. When the bond matures, they pay back the amount they borrowed. You receive higher rates than a savings account but less than the stock market. That said, the risk of loss is also generally lower than stocks. The long-term average interest paid on bonds is just over 5% per year, according to Vanguard.
FAQs
This depends a lot on your lifestyle and where you live. Some places are more expensive than others. The general savings guideline is to save 20% of after-tax income. Therefore, if you save 20% and make £2,500, you’d be saving £500. Saving £1,000 a month would be 20% of £5,000.
The average monthly household savings in the UK is £480 per month, according to NimbleFins. Although, this is skewed by households in the top quintile since they can save large amounts, which affects the average. The median monthly savings in the UK is £180 – this means 50% of people save more than this and 50% save less.
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