How To Start Saving
You’ve landed your first job at a startup. You may not be earning the super high salaries of some of your friends who have chosen to go into investment banking or law. But you’re excited about being part of something new and having the opportunity to grow with the company.
Getting your first pay cheque is an amazing feeling. You’ve gone from living off student loans, overdrafts, parents, and part-time work to finally getting some real money in the bank. You’ve got the opportunity to spend money on things you want rather than things you need and hopefully you’ve got a little left over to start thinking about saving.
What does saving really mean?
You have 3 options for the money in your life:
- Use it now
- Use it in the future
- Give it to someone else (either now or in the future)
The 3rd option is slightly more complex as the person receiving it might be a child or a family member. For example, saving to pay for university fees or money set aside to leave as an inheritance. It’s probably not something you need to worry about at this stage in your life, so for now, let’s ignore it.
You therefore have 2 choices about what to do with your money; use it now or use it later.
Today or tomorrow?
Using money today isn’t a bad thing. In fact, it’s a necessity. You need to pay for clothes, food, a roof over your head, and transport. These are your NEEDS. You also have WANTS, which is the fun stuff you buy. This does cover clothes and food but will also include things like nights out, holidays and other entertainment.
The amount you save today is based on a decision: do you want to cover your basic needs and have fun today, or will you have greater needs and want to have more fun in the future. For example, instead of renting your entire life (which does cover a basic need) do you eventually want to buy a house?
Before you start saving you need to understand these goals. If you have goals for the future then you need to consider how you will save to get there. Begin by writing down all your short-term, medium-term, and long-term goals.
The next step is to create a budget The simplest way to do this is to work out how much you earn and spend each week or month. You will also need to factor in lump sum earnings, such as bonuses or commission payments, and lump sum spends, such as money spent on holidays or Christmas. Don’t worry about itemizing everything. Just cover the big items like rent, food, and utility bills and have a contingency for smaller things such as coffees and nights out.
Once you have written down all your income and outgoings you may find that you’re spending more than you earn. If this is the case then you need to find out why and what you can do to fix the situation. Otherwise you’re going to find yourself in debt before long. It may be the case that you’re simply not being paid enough. This can be challenge for many young people and those working in certain industries such as retail. Or you may just have poor spending habits. You are spending on too many WANTS.
If you’re fortunate enough to be spending less than you earn and you have a surplus then congratulations! You can start to think about saving.
Pay off debts
Before you begin to save you must pay off any debts, such as credit cards, catalogue accounts, and personal loans. These are more than likely to have an interest rate of over 5% which is hard to beat from saving or investing. You’ll also feel happier once your debts are cleared and once they’re gone you’ll have an even bigger surplus each month.
Open a savings account
Open a simple savings account at a bank or building society. This could be in a branch or online. You don’t need anything fancy at this stage and you want to be able to easily access your funds so don’t choose anything with a notice period. Check out MoneySupermarket to find the best deals.
Pay yourself first. This means that you put away the money for your savings before you spend on your WANTS. Otherwise you’ll get to the end of the month and you won’t have anything left to save. Get into the habit of putting away your savings as soon as you get paid. It doesn’t have to be much to begin with, but it will soon start to add up.
Your first goal is to save £1000. This is your emergency fund, some spare cash that can pay for life’s surprises such as a dentist bill, new phone, or when your car breaks down. It also means that you can spend money at Christmas without needing to use loans or credit cards which will set you back the following year.
Once you have saved £1000 your next goal is £2000. This means not only do you have your emergency fund and Christmas covered but if the worst does happen you won’t have to take your savings down to zero. You’ll start to build up a buffer to cover yourself.
You can now start thinking about longer-term goals. Some of those bigger WANTS and NEEDS. Do you want a new car, a dream holiday, or the deposit for a house? Write down your target and start saving towards it. If you’ve had a pay rise since you started saving, try and put a bit extra aside each month.
Don’t take risks
Until you have saved over £10,000 in cash do not think about putting your money into stocks and shares or other investments. Although you may get a bigger return, they are much riskier, and you need to keep your money invested for a much longer period.
Once you’ve reached your savings goal you can withdraw your money and spend it. It will feel great knowing that you’ve paid for something you really wanted yourself without having to get into debt to do so.