How much should you save each month?
We'd all like to save more money. When it's time to pay for holidays, emergency repairs or periods of unemployment, it's reassuring to have a soft bed of cash to fall back on.
Living without any form of savings is a risky strategy, but one that many of us feel tied into.
Nevertheless, it usually is possible to save something - it's just a matter of carrying out a little analysis.
How much should you be spending?
Before calculating your own spending, it's worth briefly examining what others are doing with their money.
The Office for National Statistics reports that the average UK household spent £484 a week in 2011.
Of course, the exact figure varies widely. For example, while the bottom 10% of households spent £187 a week, the middle 'decile' of households spent £508.
The largest costs for the typical British family are:
- £66 on cars and public transport
- £64 on TVs, computers, newspapers, books, leisure activities and package holidays
- £63 on rentals for housing, and electricity, gas and other fuels
- £55 on food and non-alcoholic drink purchases
The secret to saving is first reducing some of these costs.
- Transportation costs can be reduced by walking or cycling wherever possible. That couple of pounds every day spent on public transport can make all the difference. If the pins aren't practical, running a cheaper car can make vast savings. Seek out a vehicle with good petrol consumption and low insurance premiums.
- Spending on leisure and cultural activities can always be reduced. However, while scrapping the budget for going out might seem good on paper, the reality is that everyone needs a little entertainment and down-time. The goal is to continue the activity, but at a reduced cost. For example, by buying second-hand equipment.
- While it's difficult to change rental costs, fuel bills can be altered quite dramatically. Shop around for the best deals using price comparison sites. Energy prices are ever-changing and the deals offered by supply companies regularly change so it's important to compare prices every six months or so to get the best value for money.
- Reducing food and drink costs can be achieved by something simple like cutting out takeaway coffee or switching supermarkets. For example, The Grocer reported that Aldi was 16% cheaper than Asda for a shopping basket of 33 items. The German discount supermarket was also found to be 20% cheaper than Tesco and 40% cheaper than Waitrose.
If, for example, we make a relatively modest saving of £10 on each of these four categories, that's a princely £40 per week for the pot.
Bear in mind that this £40 can also be made up from savings made elsewhere - such as clothing or furniture.
Is anyone managing to save?
At the end of 2012, Brits were managing to save 7.7% of their disposable income. This figure, known as the Household savings Ratio, has been rising since 2008 when consumers began reigning in their spending.
Despite this seemingly positive trend, a survey conducted by HSBC revealed that around a third of UK families had less than £250 in savings.
With household outgoings at around £55 per day, this would mean that they would run out of cash in just three days should a financial emergency darken their doorstep.
ING Direct also released figures in 2011 that showed the UK average savings pot was just £1,574 - less than 1.2 times the average monthly salary at the time.
As a rough guide, financial analysts suggest that people should have at least three months' worth of take-home pay as an 'emergency fund'. This roughly equates to savings amounting to £5,576.
Reaching this figure is apparently easier for some than for others - HSBC has identified three distinct groups of savers:
- Successful savers - those that saved more than they withdrew
- Struggling savers - those that withdrew more than they paid in to their savings pot
- Static savers - those that saved as much as they withdrew
For struggling and static savers, the goal of saving three months' wages might seem a long way off.
The point to remember is that saving doesn't have to be rushed. If we take the theoretical £40 a week saving already mentioned, the average Brit could expect to meet the £5,576 in roughly two and a half years - which isn't bad.
Making it work
Savings only work if they accumulate. That means keeping them away from day-to-day finances.
Setting up a savings account fed by a standing order is the easiest way to manage the process. Try and set the date of the standing order so that it falls on the same day as the arrival of your wages.
It's a budgeting technique we've covered in this guide, and means that the money destined for saving doesn't hang around for too long.
The most suitable type of account will depend on what type of saver you are.
Successful savers will be able to opt for higher interest accounts that require regular payments and a relatively long period of notice before money is withdrawn.
Static and struggling savers should start out with savings accounts that let them pay money in when they want and to make withdrawals with little or no notice. This gives them a little breathing room in the early stages of saving. After a year of successful saving, it's worth transferring the money to a more rigid savings product.
For more on the different types of savings accounts and which earn the most interest see our guide here.
Remember that there are no hard and fast rules about savings. Any savings are better than no savings, and the peace of mind that financial fall-back can bring will be worth it.
If you find that you're struggling to meet your savings goals, review your finances again and amend the amount. Don't succumb to the temptation to simply give up.