Road to FIRE #3: Building a savings habit

Hard to build and so easy to spend (credit)

Now on to the fun part of building up your savings! When you have savings, the threat of an unexpected bill, worrying about whether you can afford a simple coffee or even just concerns about money in general slowly fade to the back of your mind. The key behind getting good at saving money is to make it a habit and stick with your plan as best as possible.

You will occasionally fail, especially at the beginning as you learn to dial in your spending and work out what you value and want to spend your money on. I myself am partial to the odd coffee out in town, but it is a pretty cheap luxury. At the end of month, check your transactions (if done on a debit card) or write down your expenses as you go in a small notebook or make a note on your phone. I have very few outgoings that require cash, so I generally stick with downloading and reviewing my transactions once a month just to check I haven’t blown my expected spending too much.

Automate your bills

Hopefully you still have your list of monthly and yearly expenses written down somewhere from the first step of this guide. If not, head back to that article and detail them all out now. Depending on how you are paid (weekly, fortnightly, monthly), work out what is paid and when. If possible, arrange Direct Debits for your monthly outgoings and set them up to go out at roughly the same time, ideally just after you get paid. This does three things:

  1. The money is not sitting around in your bank account tempting you to spend it.
  2. Your bills are paid on time and help build up your credit score (missed payments are not good!).
  3. If there are any issues with the Direct Debit not going out (bank issues for example), you are covered by the Direct Debit Guarantee which means you won’t be at fault and the financial institute in question must resolve your issue.

For example, I am currently paid on the last working day of the month. On the 1st of every month, I transfer all the required monies for the coming month to a separate account. From this account I have all my Direct Debits for things such as broadband, utilities, mortgage and mobile phones. I do not take money out of this account as a rule. Within the first week, most of the Direct Debits have been taken and I am clear for another month of my fixed costs! I also get some cashback thrown into the deal as well (take that, council tax bill…)!

I now know that whatever I have left in my normal account is available for the coming month’s variable costs (food, travel, the occasional coffee). Track your discretionary spending for a few months to see what you spend on and consciously consider every purchase.

Do you actually need it? Can you afford it?

Is there another way to get the same thing cheaper?

Ask yourself these questions every time you put your hand in your wallet/purse. It is incredible in this day and age how little thought goes into making a conscious decision for a purchase. I still catch myself occasionally going “I’m hungry and they’re selling burgers over there; I’ll just go get one” (damn you Five Guys and your delicious burgers).

What I’ve actually done is fail to plan ahead. I knew I would be out and I knew I’d have to eat lunch at some point. As I failed to make my own tasty food and bring it from home, the next best option is to get some healthy, not too expensive food instead. I find it very rare there is not a supermarket of some description around and they tend to sell sandwiches and wraps at not entirely extortionate prices. Chalk it up to experience and do better next time.

Savings Rates & Time Periods

Armed with a rough estimate of how much you have left over a month, it’s time to start putting this money to work. Your goal is to build up an amount of savings equal to six months of your outgoings. It doesn’t matter how much money this is equal to – if you save a certain percentage of your income every month you will get there. If you can save a higher percentage, then you will get there faster, if it’s only a small percentage, it will take a bit longer. But you can absolutely do it. Below is a graph showing how long you will need to save up this amount for different savings rates – don’t be discouraged if you’re on the lower end of the savings rates – pay attention to the fact you can actually get there!

How much time (in months) to save up a 6 month buffer, based on a percentage savings rate

Another way to view this data, is to see how savings rates and time periods interact:

An alternative view comparing savings rate and time (in months) to save a 6 month buffer

As you can see, at the high savings rate end (50% savings), you will get there in about a year, which makes sense as if you’re saving half your salary, it’ll take twice as long to get there as opposed to somehow saving 100% of your salary. At 25% savings, it takes 2 years, etc. But note how the left hand side of the graph drops dramatically when moving from tiny amounts, like 5% to even 20%. If your after-tax salary is £1,000/month then moving from £50 (5%) to £200 (20%) reduces the time taken to build your buffer by 30 months! That’s 2 and a half years!

Regular Savers & Savings Accounts

To help you on your way, I would strongly consider setting up a savings account separate from your day-to-day available funds. Putting them in a separate account puts a bit of friction into the process of spending that cash and they don’t usually come with debit cards which is a bonus! There are two types of savings accounts I would recommend (with links to the best current ones courtesy of MoneySavingExpert):

  • Regular Savings Accounts – these are accounts where you can contribute up to a set amount each month and the money is locked away for a year (you can usually close the account at any time and get all your money back, but with no interest paid, if required). These offer higher savings rates than ‘easy access’ savings accounts and are good for building a savings habit as you need to contribute the minimum amount each month to keep the savings rate.
  • Easy Access Savings Accounts – these offer instant access to your money but unlike a regular savings account, the rates tend to be much lower. The money I put in here is when I think I will need it in the near future due to upcoming expenses or a particular item I am saving up for, but which won’t take a whole year to purchase.

Enforcing the habit

Want to know two of the most powerful ways to enforce your savings habit? Set up a regular reminder of what your target is and make sure you’re keeping on track. A money diary / spreadsheet that you keep up to date once a month will show you that you’re making progress and will encourage you to keep on. I still have a spreadsheet that I update every month with the current balances of my various accounts. It is always satisfying to see that, while some months it may be small amounts, my balances have generally crept up bit by bit as I look back months and years ago to where I was.

Use anything and everything at your disposal to get you into the savings habit (credit)

Set up a recurring reminder on your phone that occurs once a week (when you’re not likely to be busy). In this reminder put “My goal is to save £xxx this month, how am I doing?” where £xxx is whatever amount you are trying to save this month. You may be over, you may be under – the point is you are consciously thinking about your spending. If you can get the savings habit going, your future self will thank you.

Feel your financial fears fade away

Even if I achieve nothing else with this blog, if I can encourage you and the rest of the people of the UK to reach the accomplish a six months cash buffer, I feel I would have achieved a great goal for myself and all of us. When you’re not living right on the edge of getting your next pay cheque, when you’re not under crushing debt and the sleepless nights that go with it and when you give yourself that breathing room, you have time to observe the world differently.

Your car tyre got a puncture? You need to go to the dentist and get a filling? You got a parking ticket because you overstayed by 10 minutes? What before was a devastating blow to your finances is now met with mild annoyance and a muttering under the breath of “Dammit, I’m not going to hit my savings goal this month!”. It really is a change of mindset for the better.

However, what if instead of having the ability to not worry about the next six months come what may, we extended that safety net out to one year? Two years? Five years? What’s your limit? What do you want to achieve? I hope you’ll stick around and learn about the next exciting steps for Financial Independence – we still have a lot of ground to cover!

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