Saving money is keeping hold of any income or gifts to use in the future. You could save for short term purchases like a holiday or Christmas. Alternatively, you could save over longer periods for larger expenses like saving for a house deposit or saving to travel the world. Whether you’re saving for one month or one decade, this article will explain how to save more money and reach your journey faster.
How to save money: the basics
Let’s begin with the three strategies people employ to save money:
- Intuitive saving
- Budget-based saving
- Cash-restricted saving
These all follow the same objective – having more money left at the end of the month. They all achieve it the same way – spending less than you’ve earned. But the way they nudge us into spending less is different. Below, we’ll explain each approach and invite you to consider which of these options appeals most to you.
How to save money with the intuitive saving method
Intuitive saving is a savings approach that is based upon will-power and on-the-spot purchase decisions. An intuitive saver simply makes a conscious effort to spend less, either by avoiding opportunities to spend money or by exercising frugality when deciding what to purchase.
For example, an intuitive saver might choose to turn down invitations for meals if they feel they’ve already spent frequently on restaurants this month. They may make modest choices when picking vacations, and will generally exercise restraint when spending money. They’ll save money on financial advice, save money on
At their heart, an intuitive saver views their entire income as ‘potential savings’ and will try to maximise the amount they can keep at the end of the month.
The advantage of intuitive saving is that no spreadsheets are required.
The disadvantage is that an intuitive saver won’t be able to accurately predict how much they will save each month, and may under or over-shoot their target.
Also, not everyone is a natural intuitive saver. Those who are more excited by the prospect of a spontaneous purchase and know they are inclined to splurge occasionally may repeat that pattern and simply spend more money than they have earned. This approach has no guard rails and relies upon the constant presence of willpower.
How to save money with the budget-based saving method
A budget-based saver creates a plan of how much money they think they will need (& would like) to spend for the month ahead. For example; £300 on groceries, £600 on rent, £150 on going out. This allows the saver to predict how much money they expect to have left at the end of the month. They can tweak the budget category amounts to improve this figure.
Although it’s not enforceable by law, a budget-based saver tries to use these budgeted amounts as spending limits. This can then drive their purchase decisions. When an opportunity to spend money appears, a budget-based saver can ask themselves ‘do I have money left in the budget for this?’. If they have a surplus left then they can go ahead without impeding their target savings level. If they are close to or have already hit their budget, then this gives a clear warning that this purchase will be detrimental to this month’s target.
Of course, real life never play out as neatly as a simple budget schedule. However, if a budget is formed accurately and a buffer is included for ‘unknown’ expenses, the overspends from some categories should offset with underspends in others.
The advantage of a budget approach is that it provides some ‘freedom to spend’ and doesn’t constrain the user to a frugal lifestyle. Passions and social activities can all fit within the budget if they are a priority.
The disadvantage is that you will need to carefully track your spending by activity to understand where you are at any given time. Budget-based savers often use an app or spreadsheet to record each expense to be able to subtotal spend by category. This can be time-consuming and for some, off-putting.
The best books about saving money often hold up the budget-based method as the preferred way for most people to save money.
How to save money with the cash-restricted saving method
Cash restricted saving is a simple but effective approach. The saver will transfers their desired monthly saving amount out of their main bank account immediately after they are paid a salary or other income.
The cash left in the bank account acts as a hard limit on the amount that can be spent for the rest of the month. It’s like a budget but within the subtly of spending limits by category.
Cash that isn’t in a bank account cannot be spent, therefore the dwindling amount left in a bank account over the course of the month is a simple motivator to rein in spending to ensure that the saver has enough cash to buy the basics until their next payday.
In an emergency, the saver can always transfer money back from their savings account to cover any necessary spending, so this restriction only goes so far. More than anything else, the bank account balance becomes a clear way to communicate to the saver how lavish or generous they can afford to be until the next payday.
The advantage of cash-restricted saving is that the saver technically achieves their desired saving amount on day one. All they need to do is survive the following month on what’s left in their main bank account to solidify the victory.
The disadvantage is that spending patterns can be uneven over the course of a month (some expenses, like groceries, are weekly, whereas many occur just once). Therefore it takes a good knowledge of upcoming payments (such as rent, mortgage payments, credit card payments) to appreciate how much disposable income you actually have available to spend. It’s all too easy to forget about payments and accidentally hit zero in your bank account if you make a miscalculation.
As a result, this method is only recommended if you have a bank account with a free overdraft to ensure that errors of this nature don’t result in bank fees.
The hierarchy of saving & investing
Saving money isn’t just a linear journey from zero money to £1 million. It’s about dividing the journey up into milestones that are achieved along the way. Each milestone brings a new level of financial stability and security.
Building a safety net – your emergency fund
The first few thousand pounds of savings will become your emerging savings fund. Once established, you’ll want to preserve this pot of savings because it represents your rainy-day fund. It’s a pot of money designed to catch you if you fall (financially speaking).
Find yourself out of work? Need to pay for a new boiler? Car break down? Your emergency fund could cover these expenses and help ensure that you don’t need to take out a short term loan just to stay afloat.
Because an emergency fund is designed to protect your finances if you lose your income, most sources suggest aiming for a pot worth 1 – 3 months of living expenses. The simple idea is that your fund can replace your income for a few months whilst you find a new job. The larger your emergency fund, the more powerful it will be. It’s like having the ultimate insurance policy.
This milestone provides a degree of financial independence because you’ll no longer be reliant upon friends, family or the government for financial help if you hit a rut. You’ll be able to use your own savings to keep going like a boss.
How to save money for an emergency fund? Use your current account or easy-access online savings account. Accessibility is key to allow you to dip into the fund quickly if necessary. Maximising the interest on your fund is not the number one priority.
Planning for fun in the future
Once you’ve covered the basics, you can begin to set aside money for fun fun fun!
The following spends are big-ticket items that can’t usually be covered by the disposable income from a single wage.
- Christmas & birthday gifts
- Car upgrades
- Fancy new devices (e.g. a gaming laptop)
This means that they’re often reasons for people taking out personal loans to afford. Using loans to pay for fun is unsustainable because the interest on that debt will jack up the total cost – meaning you’ll afford a lot less stuff over the long run. And who wants to choose less than more?
Exercising the patience to save up amounts to cover big-ticket items upfront will mean that you’ll have an allocated amount of money set aside ready.
How to save money for future fun? Use a savings account that matches the term of your future spend to generate the highest interest rate you can. The faster you can grow your savings, the more you’ll have to spend on travelling and more!
Saving for life’s great expenses
You’ve got life’s short term and medium-term expenses covered. What’s left to save for? The huge spends which accompany life’s greatest events.
- Getting married
- Buying a house
- Retiring and living off your assets
These are financial objectives that require years and years of saving. Not everyone succeeds in actually saving enough to buy the house they want, the wedding day they want, the quality of life in retirement they want. It’ll take financial discipline, strategy and tough decisions to get to where you want to be.
In our article explaining the differences between saving and investing, we highlight that interest rates on savings accounts are dismally low and fail to keep up with inflation. This means that money you put into a savings account might buy less when you withdraw it after ten years!
In contrast, if you choose the best funds to invest in, your investment portfolio could produce a return of 3% – 5% with a moderate risk level, and even higher with an aggressive risk level.
Investments carry a risk of capital loss and therefore aren’t suitable for everyone. But when investing over a very long period of time, you should appreciate that you can bear the risk of temporary dips in the value of your investments, because you have the time to wait for the eventual recovery.
People who choose to invest for their future using sensible investing principles instead of saving in a bank account will, on average, be able to afford a more lavish lifestyle. If you’d like to learn more about investing, check out the best investing books and personal finance books which will introduce you to the topics discussed in this article.