How to save for your next financial goal

Ways to save money

As a first step, you need to closely examine your finances and work out how much you can realistically afford to save each month.

Calculate your monthly income and outgoings to see whether you have any leftover cash. Creating a budget can help you with this.

If money is tight, you need to look for ways to reduce costs and give your savings a boost. For example:

• Shop around when renewing your insurance. Whenever your car insurance or home insurance is up for renewal, shop around to see if you can find a cheaper deal

• Reduce your household bills. To save further funds, it’s also worth looking for cheaper broadband and mobile phone deals – but you need to ensure you’re out of contract first.

• Save on your debts. Consider moving to a cheaper loan or shifting credit card debt to a 0% balance transfer credit card to save interest 

• Make cutbacks: Small steps can all free up cash to put towards your savings. Examples include giving up daily takeaway coffees, going out less often or quitting smoking

How to set a savings goal

You now need to set a realistic savings goal. It needs to be achievable – otherwise, it can be easy to give up.

Think about what you’re saving for, how much you ideally want to save in total, and how many months you need to reach your goal. Certain goals might already have deadlines – for example, if you’re saving up for your wedding – while others will be more flexible.

Divide the amount you want to save by the number of months in your timeframe. If this amount is greater than the amount you can afford to save each month, you’ll need to adjust your goal or look for other areas to make cutbacks. 

For example, if you need to save £100 a month to reach your goal but can only afford to save £70, see whether you could reduce your spending to gain the extra £30.

On the other hand, if you need to save £100 a month but have budgeted to save £120 a month, you might be able to reach your goal faster. 

Automate your savings

Setting up a standing order to move cash straight into your savings account each month helps automate the process, letting your savings build up without you thinking about it. This approach can prevent you from using the money you’d planned to save for something else.

However, it makes no sense to go overdrawn because of automated transfers. If this is likely to happen to you, you may prefer to retain control by making payments manually.

The day before payday is a great time to move money, as you can see exactly how much you have left over. Setting a reminder in your calendar to check this will help you remember to act.

It’s also worth checking whether your bank offers extra features to help you save. Some, for example, offer a ‘round-ups’ feature whereby every time you spend on your debit card, the bank rounds up the amount to the nearest pound and transfers the difference to your savings account, helping you save more.

How to get the most interest on your savings

When saving money, you want to earn as much interest as possible on your cash. But before you simply pick the highest-paying savings account you can find, you need to consider which type of savings account works best for you. 

An instant-access savings account can be a good place to start because it lets you access your money whenever you need to, penalty-free. You can open some of these accounts with just £1. 

However, easy-access accounts don’t usually pay the highest interest rates. The rates also tend to be variable, so you’ll need to monitor it and be ready to move to a better savings account if the rate drops.

To earn more interest, you might want to stash away some money in the following accounts:

A regular savings account

These accounts require you to pay in a set amount each month, say between £25 and £300, for 12 months. This makes them ideal for saving for a specific goal. Depending on the provider, you might be unable to access your savings during this time. Rates tend to be higher compared to easy-access accounts. 

A fixed-rate bond

Fixed-rate bonds require you to leave your funds untouched for a set time, often between one and five years. But in return, you’ll receive a higher interest rate. These accounts are generally best for longer-term savings and lump sum deposits, as you can’t usually add to your savings once the account is open. 

Cash ISAs

There are two types of cash ISAs – instant access and fixed-rate. Unlike standard savings accounts, you never have to pay tax on the interest you earn. This can make cash ISAs a good choice if you’re likely to exceed your personal savings allowance. 

Lifetime ISAs are a type of ISA designed to help you save for a house deposit or retirement. You can pay up to £4,000 into a Lifetime ISA each year, and the government will add a 25% bonus. You’ll need to be between 18 and 40 to open one.

Should you have multiple savings accounts?

Having multiple savings accounts can be a great way to help you save for different goals. For example, you might want to:

• Open an instant-access account to build an emergency savings fund

• Open a regular saver account to save for a holiday 

• Open a Lifetime ISA to save for a house deposit

Keeping your money in separate accounts makes monitoring exactly how much you’ve saved for each goal easier. It can also reduce the temptation to dip into your emergency savings fund to pay for your holiday, for example. 

If you’re likely to save over £85,000 over the years, it’s best to spread your savings across different banks to ensure you don’t exceed the cover limit provided by the Financial Services Compensation Scheme (FSCS).