here, we will discuss how to save, how much you should be saving and what to do with those savings when they start to build up.
how do i save money every month?
how much money should i be saving?
what should i do with the savings that i have built up?
we all know that saving is an integral part of financial and retirement planning.
so just what are the best ways to save money?
very simply, it is best to view saving money as a compulsory activity that you should do every month, in the same way that you pay your phone bill or pay the rent/ mortgage.
savings should come out of your account as soon as your monthly salary goes in. that way, you don't miss it or you can't spend it.
a vitally important factor of saving money is creating a budget and understanding exactly what you are spending your money on. i would encourage everyone reading this to sit down and go through their bank statements for the past three months and write down everything you have spent money on. i promise you that you will be shocked at where your money goes and therefore, will be able to target areas of saving easily.
once you have got a clear understanding of where you are spending your money, you can then create a budget to stick to moving forward.
this monthly budget should include sending money into your savings account at the beginning of the month and then making the remaining budget last for the rest of the month.
it is also important to create goals for your savings. understand exactly what you are saving for and create a target based on time and amount saved. this way you will be a lot more motivated to save.
there is no hard and fast rule about how much each person should be saving, but we could all benefit from sticking to a few simple guidelines that work for the vast majority of people.
the general rule of thumb is the following:
50% of your income should go on essentials (rent, food etc)
30% of your income should go on wants (dining out, entertainment etc)
20% of your income should go on savings
i'm going to say we should reverse the two latter rules and 30% should go into savings and only 20% on wants.
this is because of the impact that savings has on your long-term goals and objectives.
let's look at retirement and how much you will need for retirement.
'financial freedom generally means having enough savings, investments, and cash on hand to afford the lifestyle we want for ourselves and our families—and a growing nest egg that will allow us to retire or pursue the career we want without being driven by earning a certain amount each year.'
to achieve financial freedom, i advise people to stick to the 4% rule in retirement, that is that you should drawdown 4% from your retirement pot each year. this means that if you want your pot to last you forever (because of growth on investments) your pot should be 25 times your desired retirement income.
as an example, if you would like £3,000 a month in retirement, you would need £36,000 a year and a pot worth £900,000.
here is a simple chart to explain how long it will take to achieve that goal with your savings:
percentage of income saved vs time required to reach 25 x annual income:
1% saved = 100 years
2% saved = 86 years
5% saved = 67 years
10% saved = 54 years
15% saved = 46 years
20% saved = 41 years
25% saved = 37 years
30% saved = 32 years
50% saved = 26 years
75% saved = 21 years
as you can see, the more you save, the quicker you will reach your retirement goal. for those that are currently saving only 10% of their income each year, it will take you 54 years to achieve complete financial freedom!
as we all know, interest rates on savings account are dire these days. at the time of writing, the bank of england has just cut interest rates down to 0.1% (an all-time low). this is good for borrowers and bad for savers.
if you see any return of less than inflation each year from your savings, then in real terms, you are losing money.
so what options are there for savings?
the best thing to do with your savings is to have it invested.
investing your savings may sound scary at first, but these days it is so easy to manage your risk and achieve positive long-term returns, there are no excuses.
when considering investing, it is important to understand the power of compounded growth.
as an example, if you invest £1,000 in year 1 and earn 10% interest, you end up with $1,100. in year 2, if you earn 10% interest on top of that, you end up with $1,210. ultimately you earn interest on your interest, which can be very powerful over the long term.
you can use compounded returns to your advantage when saving for retirement and as you can see from the below examples, the sooner you save, the more you will make.
i have created four different scenarios, where four people have started saving for their retirement at different stages of their life. these calculations are based on these people saving £1,000 per month and seeing a return of 8% per annum until they retire (this figure is based on the average return of the MSCI World Index since 1987).
all these people are aiming to retire at 65 years old:
by the time they reach 65 years' old, this is how much each person has:
sarah has managed to amass a lump sum of over £3.5 million from just saving £1,000 per month for her working life. we can put this into context when we consider how much these guys would have if they just saved and did not see a return on their investment:
if you put this into context, sarah has made over £3,000,000 on interest alone, over that forty-year period. this shows how important it is to have your money working hard for you and not just put it in a bank or under the mattress.
speak with us today to discuss the various options available to you with your savings.