Breaking bad habits and making savings habits!
I’ll never forget that look my father gave me. His lips pursed in frustration, eyes aflame, brow creased like a rusted piece of corrugated iron in ridges of displeasure. And that finger, shaking with rage, levelled at me. “No son of mine is going to be a dancer!” My mother, passive but shrewd in her neutrality, new full well that I wouldn’t make it (there is a genetically-proven lack of rhythm in our family) and just smiled quietly. I was saving to pursue my dream career in dance, and saving (no matter what for) was the best habit to get into in her eyes. The argument escalated (in retrospect performing the arabesque to demonstrate my dancing prowess only seemed to aggravate him further), his mouth began foaming like an over-exerted llama as his words transformed into incoherent shrieks…
Needless to say my dancing dream was never realised. Nor was my training as a Steeplejack ever completed or my attempt to make the GB Dressage team in time for the Beijing Olympics. All these setbacks haven’t affected me; indeed they have steeled my character to the next challenge. In the meantime though my savings have grown into a sizeable nest egg, so much so that the last time I acquainted her with the balance it brought a tear to my dear mother’s eye.
You see, saving is a really good habit to get in to. So much these days is made of bad habits, that positive habits quite often go unnoticed or unremarked upon. I am not a good authority on modern dance, but I can give you tips on how to get into that most wonderful of habits: the saving habit.
Before you look to start saving, put your finances under the spotlight. Total up your monthly bills. Do you have an overdraft or credit card? If you do, make paying these off your priority (unless you have a rate of 0% and are disciplined enough to repay before the rate goes up). When you have been through your finances, work out how much you can save. Be realistic about this and only cut your leisure budget or make sacrifices if you think you can honestly stick to it.
Once you know how much you can afford to save, the next thing to think about is the reason you want to save. Usually this will be for:
- An emergency fund. This is the first thing you should try to have saved. It can provide a safety net if you are made redundant or another unexpected event puts pressure on your finances. Typically you would aim to save the equivalent of a few months’ salary but this will vary dependent on your circumstances. Take time to think about how much you would ideally like set aside and then aim to save towards that goal.
- A big purchase, such as a car, holiday, deposit on a house or private dance tuition with Darcey Bussell. This kind of saving is generally over a shorter term and therefore is easier to motivate yourself for as there is the tangible reward at the end. Here’s an idea: a lot of shops will do “buy now, pay later” offers on big ticket goods such as televisions or sofas. If you have the money saved, keep it saved and use the buy now, pay later. You then pay for the goods at the end of the period, but keep earning the interest on your savings in the meantime!
- A future time when you won’t be as prosperous as you are now. This could be to subsidise your income in retirement or to fund your fledgling modern dance career. This type of saving is no less important but can be more difficult to motivate for as the goal might seem less exciting and will take longer to achieve.
So, you know what you are saving for, and how much you can afford to save. Now what to do with it? Well the most common thing to do with your savings is to put them into a bank or building society as opposed to in a pink pig with a coin slot, or under a mattress. They might have had some bad press recently, but there are still good reasons to put your money into a savings account:
1. “The most powerful force in the universe is compound interest” Albert Einstein once said. This is probably the most pressing argument for putting your money in a bank or building society. In return for the use of your savings (which the bank or building society will lend out to other people), you receive interest on the money you put in. If the account you have pays compound interest (where the interest you receive is added to the balance, and then you earn interest the next time on the new balance), your savings pot will grow and then snowball. For instance, an account paying 4% net interest a year on a savings pot of £100 will have a balance of £148 after ten years. Whereas £100 placed in a ceramic pig will still be £100 at the end of ten years. Beware though, keep an eye on the rate you receive as rates are often higher to lure you in and are then quietly cut later on. If you don’t want to keep changing accounts all the time, there are some accounts that (although maybe not having the very best rates available) offer more consistent savings rates.
2. Your money is safer. Keeping money under your mattress, as well as being smelly and desperately uncomfortable (but strangely – very warm!) is not the safest option. Because banks and building societies hold lots of money, from lots of different people, if it is stolen or lost you won’t suffer as you would if someone stole your mattress, as any losses would be reimbursed by the bank or building society. If your money is in an institution that goes bust, it will be protected by the Financial Services Compensation Scheme (FSCS) for up to £50,000 per person, per bank or building society.
3. This leads me onto another reason to put your money into a savings account: inflation. Inflation is to do with the spending power of money. For example, £100 in 1980 would buy you a lot more than £100 would today. So in order to combat inflation, the answer is to earn more money. This is why a lot of companies link “pay rises” to the rate of inflation, so that the salary paid stays the same in real terms. Your savings can also suffer from inflation; but, by earning a rate of interest that is greater than the rate of inflation; your money will continue to grow.
Current Accounts
Try not to save in a current account. Although some accounts offer a headline-grabbing rate of interest, this will normally only be offered up to a certain balance. Therefore if you are saving a larger amount, it is generally better to have your pot in a savings account.
Bad at saving?
It can be too tempting sometimes to spend the money you intended to save. A way to help with this is a Regular Savings account. Your nominated amount can be taken from your bank account by standing order, just like paying a bill. Then you are only left with the money that you can spend. One word of warning though: most Regular Savings accounts will require a minimum monthly contribution, typically between £10 and £30.
The savings habit then.
I’m now off to limber up for my tap class but hopefully this introduction will give you the beginnings of how to start saving, remembering to compare the best savings rates. The savings habit though, where does that term come from? Well, for the semanticists amongst you the saving habit actually has its root with the church. In the late twelfth century, at an isolated Cistercian monastery in Burgundy, the monks began collecting money, which he sewed into the lining of his habit. From this unlikely (and completely fabricated) origin, we get the term for collecting money, and keeping it for later use: the savings habit.