How to reach your savings goals

Why saving your money is important

The cost of living crisis makes putting money away in savings more difficult than ever for a lot of people.

When bills and day-to-day costs go up, it’s not surprising that any money you might normally add to your savings is now needed to cover your energy, mortgage or food bills.

Here are some reasons you should still try to build up your savings pot if you possibly can:

Building a safety net: Saving money provides you with a safety net for unexpected emergencies or expenses. Life can throw surprises at you when you least expect it, so having savings to cover things like emergency car repairs or job loss can prevent you from getting into expensive debt.
Breaking the cycle of debt: If you're struggling with a below-average credit rating, it's likely that you have some existing debt. Saving money allows you to gradually pay off your debts and break free from the cycle of borrowing.
Achieving financial goals: If you can use savings, rather than borrow, to make big purchases, you won’t have to pay interest. This could give you more money to achieve your future financial goals.
Building better credit: Saving can help improve your credit score because it shows responsible financial behaviour, and it can be used to clear debts and reduce your reliance on credit.
Creating good financial habits: Saving isn’t easy, especially at the moment. However, it encourages you to budget, prioritise needs over wants, and help you to make careful spending decisions.

Saving is a vital step toward improving your financial situation. By making saving a priority and building good financial habits, you can pave the way for a better financial future.

What is a good savings goal to have?

Having a set savings goal is a great way to motivate yourself to start building your savings.

Your savings goal should be determined by your needs and circumstances. The easy answer is ‘the more the better’, but this may not be realistic or motivating. It’s therefore worth thinking carefully about why you are saving to help you set your goal.

If you don’t have any savings yet, a great first goal is to create an emergency fund. This is money you can use if you have any unexpected expenses or lose your job. A good emergency fund savings goal is three months’ worth of living costs, so this pot would fund all your essential spending for three months if you had no income.

Alternatively, if you have outstanding debts you really want to clear, use these as your goal. Aim to save up enough to clear your debts, trying to paying-off your most expensive borrowing first (the one with the highest interest rate). Clearing debt will free up more money that you can save in the future.

Think about your short and long-term financial goals as well. If you have an upcoming purchase like a holiday or a deposit for a car, use this as your savings goal so you don’t have to rely on credit.

Bigger, long-term goals like buying a house, starting a business or retirement might take a bit more planning and careful saving over a longer period of time. To stay motivated you could set smaller milestones, such as celebrating reaching 25% of your house deposit target.

The key to setting a good savings goal is to make it specific and realistic, with a planned time frame. Your savings goals should be challenging, but still achievable.

How much money should I keep in savings?

The specific amount you should keep in savings is totally dependent on your personal situation.

As mentioned above, it is often a good idea to keep at least three months’ worth of living costs in savings as a safety net.

Anything you can build up on top of this is a bonus or can be used when saving for something specific. For example, if you are going on a holiday that will cost £1,000, try to save this on top of your emergency fund, so you still have a safety net once the holiday is paid for.

However, although it’s always a good idea to build up your savings, you may want to consider prioritising paying off high-interest debt first. Unless you have a 0% interest rate credit card offer, for example, it’s unlikely you’ll be able to make more in interest from savings than you pay in interest on this debt. Therefore you could be better off overall by paying this off.

How to set a savings budget

Setting a savings budget is a helpful step to take to maximise chances of achieving your savings goals. To understand how much you can save, you need to fully understand your financial situation.

The best way to do this is by creating a household budget. A good budget will break down how much money you have coming in and how much you have going out every week or month.

Using a budget planner is a good place to start. This is an easy-to-use tool that will allow you to enter all your income and expenses so you can see how much money you’re left with each month.

It’s really important you’re as honest and thorough as possible when completing your planner, or you won’t get an accurate result. Any money left over is what you can use to build your savings.

You may also want to use a savings calculator. This tool can help you work out how much you need to save regularly to reach your goal or how long it will take.

Different types of savings accounts

There are several different types of savings accounts you can choose from - here are some of the main types:

Instant access accounts: These accounts allow you to add money and withdraw it whenever you like without notice or a penalty. These usually pay a relatively low rate of interest.
Notice accounts: For these accounts, you will need to give notice before you can withdraw money, such as 30 or 60 days. For this reason, they usually pay a higher rate of interest than instant access accounts.
Regular saver: Here you’ll be required to pay in a set amount each month, e.g. £50 or £100. These are good for getting you into the habit of saving, and can offer relatively high interest rates, but you’re usually capped on how much you can save into them.
Fixed-rate bonds: This type of account means your money is tied-up for a set term, like one year. During this time you can’t withdraw from the account or add any extra money to it. These accounts usually have higher interest rates than instant access and notice accounts.
ISAs: Individual Savings Accounts (ISA), allow you to save a set amount (known as the ISA allowance) without paying any tax on the interest you earn. The allowance is currently £20,000, and there are different types of ISA you can choose from, including instant access ISAs and fixed-term ISAs.

Think about how you plan to save to work out what the right type of account is for you. For example, if you might need to withdraw from the account regularly, consider an instant access account.

If you won’t need the money for a long time, and have a lump sum to save, a fixed-rate bond could earn you the most interest.

How to make the most out of government savings schemes

There are a couple of government saving schemes that could help you achieve your savings goals faster

Help to Save is a type of savings account that allows people on Working Tax Credit or Universal Credit to get a bonus from the government of 50p for every £1 they save over four years.

You can save between £1 and £50 a month and will receive the bonus at the end of the second year and again at the end of the fourth year.

After four years the account is closed, so you could potentially earn a bonus of £1,200 if you pay in the maximum amount each month and keep the account open for the full term.

A Lifetime ISA is another government-backed savings account designed to help you save for your first home or for later in life.

You can save up to £4,000 a year, and the government will add a bonus of 25% to your savings. You can only withdraw money from your Lifetime ISA to purchase your first home, or when you’re over 60 years old.

What are the tax implications of different savings options?

As already mentioned, ISAs are tax-efficient savings accounts where you can save up to £20,000 a year without paying tax on the interest you earn.

However, you can also save tax-free in regular savings accounts by using the Personal Savings Allowance (PSA).

This allowance is for non-ISA savings and means basic-rate taxpayers can earn up to £1,000 interest per year tax-free, and higher-rate taxpayers can earn up to £500. Additional-rate taxpayers don’t have a Personal Savings Allowance.

If you’re saving for your retirement by investing in your pension, your contributions will receive tax relief. However, you may have to pay tax on withdrawals depending on your income and how you choose to take the money.

If you’re unsure about how savings will affect your tax status, or which option is best for you, seek financial advice so you know where you stand.

Tips for boosting your savings

Here are a few ways you can help your savings grow as quickly as possible:

Shop around to make sure you’re earning the best rate for the type of savings account you need
Use your ISA allowance to earn interest tax-free
Pay off expensive debt first before you start saving
Be strict with your budget and get rid of any unnecessary expenses so you have more available to save
Set up a direct debit payment straight into your savings account each month to keep it growing regularly
Add spending limits to your credit and debit cards
Try doing a no-spend day every month to build the money-saving habit

How can I overcome temptations and stick to my savings plan?

Sticking to a savings plan isn’t easy, and there will always be plenty of temptations along the way to reaching your goal. Here are a few things you can do to keep you on the right path:

Tell a friend or family member about your savings goal so they can support you and hold you accountable
Wait 24 hours before making non-essential purchases to check you aren’t purchasing impulsively
Set up regular payments so the money goes into your savings account before you can be tempted to spend it on something else
Stay motivated by regularly checking your progress - seeing your savings grow can encourage you to keep at it
Visualise your goals to help keep them front of mind so you can feel motivated about what you’re saving for