Saving money is not the easiest thing to do – especially not against rising household costs. But, with no end in sight for the current inflation crisis, it is – if anything – more important than ever to think about saving and the benefits it can offer. While it can be difficult to justify in the short-term, it offers no end in long-term benefits. But why is that, and how can you equitably engage with saving?
Why Save?
Saving is almost its own reward, but not often enough to inspire people to engage in it. Importantly, saving is a vital step in creating long-term financial security; it allows you to easily manage unexpected costs and even enjoy yourself a little, knowing your next few bills are covered.
Saving also provides a route to passively – or semi-passively – growing your financial holdings through interest and investments.
Cash ISAs are excellent vehicles for earning interest, often offering higher interest rates than other kinds of saving accounts; Stocks and Shares ISAs, meanwhile, allow you to invest in the stock market and grow your savings more actively.
Debts First
Before you start saving in any capacity, though, something should take priority: paying off outstanding debts. This isn’t just to relieve any stress associated with them, though that is absolutely a positive factor in thinking debt-first; there is also a financially sound methodology to it.
Whether you are saving for emergencies or for the long term, the interest rates on your debt will always eat into what you could be saving – leaving you with less overall than if you paid your debts before starting to save. Any and all money that would be geared towards savings should instead be put towards early repayment of credit cards and loans, freeing you to save efficiently in the future.
The Emergency Pot
With your debt obligations paid, you can turn your focus to your short-term savings goals – which should essentially be three to six months’ worth of wages in an accessible account. This is not your ‘rainy day’ fund, per se, but rather a buffer to prevent emergencies from threatening your financial security.
Long-Term Savings Vehicles
With your short-term emergency fund built up, you can now start to think about the longer-term impacts of saving money. Here is where the big goals come in, whether you’re saving for a significantly expensive holiday, a home or even just for greater stability in later life and retirement.
Depending on your specific goals, some financial products will come in handy more than others. As mentioned earlier, ISAs are good options for savings accounts with relatively high rates of interest, particularly if you do not mind having limited access to your money. But if you’re saving specifically for retirement or your first home, a better option might be a LISA – or Lifetime ISA, that incorporates an annual government bonus on any savings.
