Savings - What to put where

How to prioritise where your money goes.

The savings missions continues and we're levelling it up this week with a closer look at where to put the cash you're siphoning away.

Maybe you've already started to dip a toe into exploring your options for savings a bit more widely and this is where it can get confusing. What's an emergency fund? Not to worry - I'm a geek for all things savings-related and I've got some wisdom to share.

Not all savings are created equal

Let's assume you're with me so far - you've reviewed your spending, cut back what's not adding value, opened up a savings account or two. Now you're able to put aside a little bit every month and it's time to think about how you want to spread out that cash to get the most out of it.

1. Get rid of debt

So far we've talked only about getting into the savings habit and ignored a potential elephant in the room - debt. If you've struggled to save before, or been a bit tight getting to the end of the month, you may have dipped into on overdraft or put a few big spends on a credit card. If that's hanging over you, building up interest, now is a great time to start chipping away at it with your new-found savings.

For credit cards, you can also do a 'balance transfer' onto a 0% credit card - this means transferring your debt onto a different card that doesn't charge you interest, so you only need to worry about paying off a set amount and it won't get bigger every month.

The faster you clear any debt and its interest, the lower your monthly outgoings will be and the more you can save - so you're gaining all round.

2. Prioritise your Pension Pot

A lot of us are guilty of thinking pensions aren't important - cash in your pocket now seems a lot higher priority than worrying about what's going to happen half a lifetime away.

The thing is that the money you save earlier in life contributes a lot more to your pension than what you pay in later years. This is because of the brilliance of compound interest - £100 put in your pension now immediately starts to earn interest, and then the interest earns interest, and then the interest's interest earns interest... and boom, you magically have this ever-multiplying pot of money to fund a retirement of travelling the world on a super-yacht*.

If you're full-time employed, your employer should be sorting one out for you so make sure you've not opted out and you're paying the maximum that you can. If you're self-employed or your circumstances are a bit different, it might be more complicated, so dedicate some time to researching your options. Spare a thought for your future wise old self and aim to funnel away a little bit of extra cash to your pension. *did I say super-yacht? I meant campervan. Still, goals!

3. Grow your Emergency Fund

If you've been reading the first blogs in this series and dutifully following my advice, you now have an instant access savings account that you're trickling money into one way or another. Hooray!

This is the start of what's often referred to as an "emergency fund". We never know what life is going to throw at us - it might not even be a massive crisis, but something as simple as moving house and needing some money for rental deposits, new furniture and all those practical bits and bobs. Standard advice says three months of living costs (rent/mortgage, bills, travel costs and the minimum you'd need to feed yourself) is a safe sum to cover you in a few different scenarios.

Don't feel disheartened if three months' living costs feels like a big amount to save, keep squirrelling away whatever small sums you can afford. One month's living costs is better than nothing, two weeks is better than nothing, £100 is better than nothing - get the gist? As long as you have any size of buffer that's getting bigger over time, you're winning.

4. Get excited for your Goals Stash

Wait a minute, I hear you say. Pensions, emergency funds, this is all sounding a bit serious and not as much fun as hoarding some money to bet it all on red in Vegas. Right you are - the best bit of saving money is being able to do more of the things you love.

Once you've got some momentum going on growing your emergency fund, anything extra you can save is Fun Money / Holiday Money / House Money - whatever goal you're aiming for, this is where you go after it.

You can keep all this money in your instant access account, or open a separate one if you want to keep a mental barrier between your emergency fund and your goals stash.

If your goal is more of a long-term one, you might want to consider a regular saver type of account. These accounts let you put an amount away every month (usually £20-£300 ish) and get a better rate of interest for 12 months (but you typically can’t withdraw it until the 12 months is up). At the end of the year, you've got a tidy lump of cash and some interest on top. Bonus.

Go forth and have some fun(ds)

Ticking off these key money priorities brings peace of mind that you're getting yourself into a really solid position financially and can live your life to the full.

Savings isn't all about retirement or when the boiler breaks, it's about being secure and free to do the things you want to do - from ski trips to that new watch you've been eyeing up – you’ve worked hard, you've earned it.

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