Saturday, February 27, 2016

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Saving on a Low Income

Savings are the cornerstone of financial security at any level. We all know that it's something we should be doing, so why do so few people manage it?
When you're living paycheque to paycheque, as many people are in the current economic climate, it becomes a daunting task to set aside any money for the future. The primary concern is to meet the rent and bills now rather than worry about hypothetical costs further down the line and this perfectly natural. This doesn't mean that it's impossible to start saving, just that it requires discipline.
So what are the key points to start saving for the future?

Firstly, start small. If you don't think that you can afford anything then start very small.
Put away £1 a week if necessary, 10 pence, whatever you can afford. Make sure that you do this regularly, have a set time every week so that you don't forget. In fact, the easiest way to do this is to set up a regular transfer from your account to a savings account. If you set the transfer to go through on the same day as your payday then the money will go straight out to your savings, it won't be in your account long enough for you to notice that it's gone!
Secondly, start today. Don't plan to start next week, next month or next year, start now. Every day that goes by your savings will increase, every day that you don't is a missed opportunity.
Another crucial point is very simple. Don't touch the savings! Towards the end of the month you may be tempted to take money out of your savings to see you through until payday, often with the intention of paying the extra back in. Don't. You'll have to pay a little more in to your savings just to get back to where you were, so you'll be more likely to do the same the next month, and the next month. It's an easy cycle to get into and a difficult one to get out of so avoid this trap in the first place.
However, you do need to establish what your savings are for. Are you saving for retirement, a new car or just to have some emergency money? What establishes an emergency? Set yourself boundaries and stick to them!
I've found it helpful to have to separate savings accounts, one for long-term, one for an emergency fund. The long-term savings I do not touch under any circumstances, that will eventually be a deposit on a house, or even a retirement fund. The emergency fund is different, this covers expenses that aren't covered in my monthly budget, but only emergency expenses.
For example, if the MOT is due on my car, then this is budgeted for and paid for out of my regular account. However, if my car breaks down and costs £200 to get back on the road, then this is an emergency payment from my savings. I need the car working and cannot afford to take that hit to my monthly budget.
Using the same example, it shows how important savings are. If I didn't have that backup in place then that would have to come out of my monthly budget and leave me short on everything else for a month. This could leave me with no money for petrol, food or even rent. Having that backup, however small it is, can make the world of difference when the situation gets difficult.
A lot of keeping control of finances is about forming the right behavioural habits and this is no exception. You'll feel the difference in your budget initially, but after a few months it's unnoticeable. You grow accustomed to living off slightly less money, meanwhile your savings can just grow and grow.

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