When it comes to saving, you may already have an effective plan in place or perhaps you’re keen to start. Saving can help you reach your goals in life, whether that means buying a house (long-term), going on holiday (short-term), or helping you out when something unexpected happens. There are many different ways to save but getting into good habits can make all the difference. One way to do this is to pay yourself first.
What does it mean to ‘pay yourself first’?
Paying yourself first is not only a way of saving money, but also a mindset that encourages better financial habits. After you’ve been paid, the first thing you probably do is pay your rent/mortgage, utilities, and expenses. Paying yourself first means putting money aside ahead of all these commitments. It allows you to put saving first and recognise it as a high priority. Once you get into the habit you’ll soon start to see your savings add up.
Set financial goals
It’s helpful to set goals, however big or small, so you have something to aim for. This means getting the big picture of your finances and assessing all of your incoming funds, monitoring your cash flow, looking at your budgets, and reviewing any assets that you may have. This will allow you to get a better understanding of which goals you want to set and how to prioritise them e.g. long-term, mid-term, short-term.
Create a savings plan
After you’ve set your goals, you’ll need to create a savings plan. Work out how much you want to save each month – 10% of what you get paid is usually a good place to start – although this can vary depending on your circumstances. Remember, getting into the habit is more important than how much you put away. You can then allocate the remainder to cover your monthly outgoings.
You can also use tools such as a savings calculator to work out how long it will take you to save a specific amount. Then it’s time to put your plan into action:
- Set up a standing order. This is really easy to set up with your bank and means you can arrange for the money to come straight out of your current account and into your savings account.
- Ask your employer if they have a workplace savings scheme that you can join. This takes money directly out of your salary and puts it into a savings account.
Decide where to put your money
It can be helpful to keep your savings separate from your current account. This makes it easier to track and manage, and you could also benefit from interest. You can check online and see what savings products your bank offers or use comparison websites to choose a savings plan that gives you the best benefits and rates.
The most common options are an ISA (Individual Savings Account) or an instant access savings account. ISAs allow you to save money and pays interest that is free of income tax – some even give you instant access to funds and others are designed to be left to mature. One example is the Lifetime ISA (LISAs) which will be launching in April 2017 and allow first-time home buyers to save up to a maximum of £4,000 a year which is then eligible for a 25% bonus. First-time home buyers, who are planning to buy sooner, can take advantage of the Help to Buy scheme which currently allows you to get on the property ladder with just a 5% deposit and a 20% loan from the government.
A savings account can also be beneficial if you regularly deposit money and banks may offer higher interest rates the more you save. You can take money out when you need to, which is great for shorter term goals such as booking a holiday.
Monitor your savings
It’s important to keep on top of your savings and make sure you are effectively monitoring progress. There are many different ways to do this – you could create a budget spreadsheet of your outgoings and savings, or use an app which is great for managing all of your accounts from one place. If you’d rather track this offline then it’s a good idea to keep receipts and carry a notebook with you so you can write down all of your spending activity and how much money you’ve saved.
Paying yourself first means consistently prioritising your savings. Getting into the habit of saving – whatever the amount – means that you’re able to make it a part of your routine. And with time, you’ll be able to put more money away each month, giving you a buffer for unexpected events and enabling you to save for future investments.