Saving for a rainy – or sunny – day!

The third of my financial 5-a-day is saving.

Once you have got on top of managing household income the next step is making best use of monthly surpluses. This is where saving comes in.

Most of us probably have an internal voice telling us we should be saving but a mix of wishful thinking and procrastination get in the way.

People often find having a goal or goals very helpful. Examples might be saving for a house deposit, holiday, going to University, weddings, buying a car or for Christmas. These may very well be relevant, but I’d suggest starting with having one month’s usual monthly spending in a savings account you can quickly access. As you build confidence that you can sustain a savings habit, stretch this to three months.

Having this kind of back up has practical and psychological benefits. It means you will have money to pay for an unexpectedly high bill, dental emergency or car breakdown. It also means you will have funds available if an opportunity comes your way, say a surprise trip away. You are also likely to find an increase in levels of confidence. If you know you have three months of expenses covered, you might be more assertive at work and be prepared to move jobs if another opportunity arises. Reducing money worries can also dial down low level anxiety.

You also need to think through where you are going to put your savings. I have worked with people who procrastinate over this and use their current account by default. This is not a great idea as interest received on these accounts is often very low – and we tend to view current account money as more psychologically available and are therefore more likely to spend it. So do not let the perfect be the enemy of the good. Simply start. Even £25 a month for a few months gets you going. Go for process rather than perfection. Websites such as Which, Moneysavingexpert.com and others often have best buy tables – usually all of which will offer a better return than a current account.

One theme running through my blogs is to work with our cognitive biases. One of these is that we are evolutionary hard wired to conserve physical and mental energy by taking easy options. Make this work for you by automating your saving – set up a monthly amount which comes out on the same date every month. You can also put barriers in your way to taking money out. These do not have to by super complex - for example make sure your savings account is with a totally different provider and keep the password written down and out of sight. Think of it like putting speed bumps in the way – you are slowing down access to your money. If your savings and current account are with the same bank it is very tempting to move money from the savings account as you near month end. Make this option harder, even slightly harder and you are less likely to do this.

You might then set yourself a challenge – if you are saving 10% of net pay now, what might have to change to increase this to 15%? What conversations might you have with other household members that will get them to buy in to the savings project?

You will find not only that your savings grow and compound over time, but so do your behavioural habits and psychological resilience around spending and saving.

By paying yourself first you will create a useful financial buffer, pave the way to meeting goals and open up options and freedom. Again, this option might not be for everyone immediately – some life situations are too challenging – but for many people living and working in the UK a savings habit is a realistic option.

Please let me know what tips and tricks you have developed to start and maintain saving. And look out for the next financial 5-a-day post!