During the pandemic, many of us saved more simply due to spending less. But now that things are back to normal – along with a cost-of-living crisis – money might be tight. How can you get into a savings frame of mind?
Due to the unusual circ*mstances of the Covid pandemic, UK household savings spiked during 2020 and 2021. With our normal economic activity slowing, as we weren’t going out much, many people were unable to spend on usual items such as holidays, leisure and eating out.
It meant the household savings ratio rose sharply (which is the percentage of disposable income that’s saved). With the end of Covid lockdowns, the savings ratio fell as people started going out and spending again.
If this trend continues, then savings are likely to continue to fall due to the cost-of-living crisis, with households seeing a fall in real income because of the rise in inflation over the past couple of years.
Many people are eating into their savings to meet the rising cost of food and energy bills, as well as everything else that’s become more expensive. So how can you get into a savings habit if yours need a boost? And how much should you have for emergencies?
Saving money can be good for your peace of mind as well as your bank balance. There are many benefits to having savings, including feeling reassured that you’ve got some money in reserve in case the unexpected happens.
Start by working out how much you need for an emergency fund, which should cover three to six months of essentials such as rent and bills, if you can afford it. This will give you a good foundation on which to build your savings.
Saving money will probably involve making a few lifestyle changes, which could be for the better. For example, cutting back on spending on the things you don’t need could be better for the environment.
There are also some fun ways to save money you might not have considered before. Saving up for something specific could also bring personal satisfaction when you reach your target figure rather than putting it on your credit card.
Saving for a goal could keep you motivated
You could just be saving for a rainy day, but it’s great to have a goal you’re working towards because it could help motivate you to keep going. You might even decide to open a cash ISA, or, if you already have one, keep it topped up if you aim to reach the maximum allowance for the tax year (which is £20,000).
At the time of writing, the interest rate on cash savings is higher than it’s been for a long time at around 5%. It’s unlikely to stay this high, so it could make sense to take advantage while you can. That’s because central banks will want to cut rates to strike the right balance between growth and inflation if economic conditions improve.
You might be surprised to discover just how much of a difference interest rates can make to your savings over the long term. For example, how long could it take you to earn £500 in interest if your savings account paid 2% rather than 5% if you had a lump sum of £100, £1,000 or £10,000? We crunched the numbers:
How long could it take to earn £500 interest on your savings?
Interest rate 2%
- Starting amount: £100 = 81 years
- Starting amount: £1,000 = 21 years
- Starting amount: £10,000 = 3 years
Interest rate 5%
- Starting amount: £100 = 36 years
- Starting amount: £1,000 = 9 years
- Starting amount: £10,000 = 1 year
NB calculations assume interest is compounded monthly, that there are no withdrawals, interest rates remain the same and the tax position doesn't change. There are tax implications on earned interest as you may benefit from the savings annual allowance up to £1,000, depending which income tax band you're in.
What these numbers show is that the more you can afford to put into your savings, the more you’ll earn in interest over time. A cash ISA is a great way to save because you won’t have to pay tax on any interest earned and you can still access your money when you need it – check first for any penalties charged or limitations on withdrawals from the account.
Getting up and running with a savings account doesn’t need a lot of planning. You can also help things along by setting some reminders and goals once you’ve looked at your budget. Eventually, you could find you’re earning interest on a healthy savings balance.
Looking for somewhere to keep your savings? Bank with Chase and you can open a saver account. Start saving with as little as you like, and we’ll calculate your interest daily and pay it monthly.
18+, UK residents. A Chase current account is required to open a saver account.
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