Why and how to save
Great to have you back and I assume that you didn’t go out and buy the wheelbarrow, shovel, seed vegetables and shotgun. Thanks to those of you who got in touch with feedback and particularly to Colin for spotting a typo in the transcript on the website. One piece of feedback I want to deal with is that some people might not believe that these podcasts are free and editorially independent. All I can say is …they are. But perhaps the only way to find out is to keep listening and make your own mind up!
This episode is about why and how to save. I’m going to do the “why” first. There are two reasons, 1. to avoid the impact of the nasty things in life and 2. to have the life that you do want. Some of what I am going to cover is going be a little glum to say the least. To make sure I don’t leave you feeling depressed at the end of this, I’ll leave the positive messages to the end – the ones about how to have the life you do want. I wish there was a better way of telling you the not so nice stuff but you need to hear it.
Everybody – even those who have absolutely no desire to be wealthy should be saving. The need for saving isn’t just about accumulating wealth; it’s about avoiding nasty shocks in life too. Those shocks can be both unexpected and expected. First the unexpected…
There is a better than one in three chance that you have not saved enough, in 2016 Shelter reported that 37% of households would be unable to cover their housing costs if one partner was out of work for more than a month. Housing costs are your rent or mortgage costs. The fact that so many people are a month away from not being able to cover those costs is shocking! It’s shocking because it means millions of people are taking big risks with their future, their security and probably their family’s security. It isn’t just losing your job or being off sick. If you are in a relationship that breaks down you will be in the same position. If you split up, one of you will stay in the home the other will have to move out but where will they find the money to rent a new place? Surfing sofas can only last so long and adding homelessness to the upheaval of a broken relationship? Well best to avoid it.
What actually happens if you can’t afford the rent/mortgage? Landlords usually try to be helpful but it depends on the landlord. Local authorities, housing associations and private landlords can be very different. Most importantly, non-payment of rent is grounds for eviction and you could be evicted within a few weeks – if you are concerned about this right now then check out the Citizens Advice website for more information, https://www.citizensadvice.org.uk/debt-and-money/help-with-debt/dealing-with-urgent-debts
If you own your home with a mortgage you will find that most banks and building societies will be pretty helpful if you are going through a tough time. But you must tell them as early as possible if you can’t make a payment.
Poverty is a major structural cause of homelessness and rough sleeping. Having a pot of money – enough for a deposit and a month’s rent would solve that! If you haven’t got that money saved and safely tucked away – you cannot afford a holiday…yet!
But there are steps you can take to avoid the problem
As a priority everyone should look to have three months money saved and easily accessible. In financial planning we recommend that this sum is in a bank or building society with immediate access. This is money you cannot ever afford to risk and cannot afford to tie up. You just night need to get your hands on it quickly one day.
Work out how much you spend every month – (it might be the same as how much you take home in pay each month) and then multiply by three. That is a pot of money you must only touch in the event of an emergency. So don’t touch it, unless there is an emergency – that is you lose your job, you’re off sick and not receiving enough sick pay. To be clear – a holiday, stag weekends, new TVs and Christmas presents are NOT emergencies!
When my son got a job I had a conversation with him where I told him everything I have just told you. In less than two years he’d saved up a three month emergency fund. A while later he moved into his first flat. One week later he called me and said he might have to reapply for his job! With his nest egg behind him the news was nowhere near as stressful as it was for some of his colleagues. By the way – if you are employed consider unemployment insurance - £8 a month will get you £500 a month for a year if it happens, money well spent! If you are self-employed or your employer offers no sickness benefit, check out sickness and accident and permanent health insurance.
Hopefully you now recognise the need to have some money behind you. But how can you save when you are struggling to make ends meet? There are a lot of people who genuinely believe their bills and expenses mean there is always too much month and the end of their money. Perhaps you are thinking that the only way that is going to change is if you get a big pay rise.
But you are almost certainly spending money you don’t need to. There are two ways to deal with bills – cut them down or cut them out. Some bills you cannot do anything about, rent , mortgage, council tax, food but there are others you can tackle. As a priority in cutting bills down, look at energy, it is one of the big bills for most people – have you switched or looked at the savings that switching supplier can provide? I have switched 6 times and saved between £500 and £700 a year each time! https://www.uswitch.com/?ref=ppcgoogle~brand~000641~uswitch&gclid=Cj0KCQiAurjgBRCqARIsAD09sg8AFoG4qHJqPz7_1Ct1927ILjO-DjNT3lveMhWBhhkELGsA7tHCNCgaAsbHEALw_wcB
Other areas you can save are broadband and telephone, insurances and mobile phone contracts. Again check out uswitch – but bear in mind there are other comparison sites and sometimes they promote deals they get paid to promote!
But let’s assume you have done all that and still can’t find money to save? You might need to look at whether or not you are spending on things you don’t really need. These are the bills you need to cut out. Do you need the latest IPhone, tablet, laptop, taxi home, Uber Eats/Deliveroo/Just eat or pre-prepared meal? Martin Lewis of Money Saving Expert has written an excellent article on how to spend less available here,
Spending less is a habit you might need to work on. There are people on very low incomes who are managing to do it. The government announced a “Help to Save” account in 2016 for people on working tax credit and universal credit. It is early days but over 90,000 people have been able to save through the scheme. If you are not on one of these benefits you too should be able to save.
Next, avoid credit cards like the plague! Borrowing £1,000 on a card at 19.9% and paying it back at £50 a month will take two years to repay and cost a total of £1,201. In other words you will pay 20% more for whatever you bought just because you used a credit card and you won’t own it outright for 24 months.
If you saved up to buy it would take 20 months to own and you would be £201 better off. On top of that two things happen. First, because it is your money and not the bank/credit card companies’, you think differently about what you spend it on and how you spend it. Second, you start haggling for deals and shopping around – when it is your money. So instead of spending a £1,000 you might get the same thing for hundreds less. You’ll find you’re much more careful about overspending when it is your money you are using. When you think it isn’t your money… you’re more willing to spend it.
In the last episode I quoted Albert Einstein on compound interest it is “the eighth wonder of the world, he who understands it, earns it; he who doesn't, pays it.” Don’t be on the wrong side of it, don’t use a credit card unless you are going to pay the debt off every month without fail.
I wish there were a cheerier way of giving you all this glum news. But before you think about investing you need an emergency fund.
Earlier I said that expected shocks happen as well as unexpected. The big one is retirement. People either put off thinking about it or believe that the state will pay them enough when they retire. Let me share some more depressing facts with you. A recent article by Which? reported that their average retired member spends £2,200 a month. Now that is probably higher than the national average but it is a figure you can benchmark yourself against. £2,200 a month is £507 a week. What will the state pension give you? £168 a week as a single person and £258 for a couple. Which? estimated that to retire on £26,600 a year you need nearly £250,000 in a pot of money. If you aren’t on track for that you have four options,
1. Spend less in retirement
2. Save more now
3. Get a better return on your savings
4. A mix of the three
At this point you might be thinking that I am a bit of a killjoy telling you to save and spend less! But it’s only taking a one-off step back so that you can move forward. It doesn’t mean never enjoying yourself, it means being sensible. Forgo a few things this year – get used to spending differently and make things easier for the rest of your life. Properly looking after your money means less worry, less stress, more peace of mind.
Now for the more positive part of the episode.
Last time I covered the difference between speculation and investment – how investment is about doing better with your money over the long term NOT about getting rich quick. In case you missed it or have forgotten here is a reminder…
£1000 invested at 7% a year will grow to nearly double over ten years. I want to look at what happens when you save regularly. If you add £100 every month to the £1000 in the last example can you guess what you would have in ten years’ time? over £19,000.
But that is just over ten years. Let’s look at what happens when you look at even longer terms. Over twenty years instead of £19,000 you would have £55,000 and over thirty years £125,000.
So the longer you invest the bigger the benefit. Another way to turbo charge your savings is to increase the amount you save each year. As you get pay rises you should be able to afford to tuck away a little more. Increasing your monthly savings of £100 in the thirty year example by just 3% each year will provide a pot of money just shy of £170,000.
Long term and sensible risk levels reap rewards! Or put another way – getting rich slow is better surer than getting rich quick.
Oh and of course - you have to resist the temptation to spend it all before you get there!!
Net time I will look at whether you should invest if you have debt. Is it better to pay off your loans or mortgages first? It will at the very least be more cheerful!!
Don’t forget that you can read the transcripts on the website or get in touch using the contact page at www.poundsshillingsandsense.com. Please if you think that what you have heard is worth sharing then please pass it on.
Catch you next time. But for now, if you think you can’t afford to save – think again, you can’t afford not to!