With so much noise and opinion available on healthy financial habits, it can often get confusing knowing whether you’re doing the right things to invest for your family’s future.
It’s important to remember there’s no one size fits all guide to help people achieve their goals. What you’re saving for is personal, so the way you save and invest should be too.
How much should I be saving each month?
There are a number of opinions circulating that dictate how much of your salary you should be saving each month to ensure your future financial wellness – usually expressed in percentage terms.
The easy answer, of course, is as much as you can. If you can afford to increase the amount you save each month, your future self will thank you.
For this reason it’s important to set a budget so you can understand how much you can sustainably afford to save each month after your necessary outgoings – like a mortgage, food and travel, for example.
It’s generally thought that you should be saving 10% of your salary each month as a minimum. This is a good starting point, but you should look to increase this to 20-30% of your salary over time.
As you get older, your priorities will evolve and the amount you can afford to put away will too.
In your twenties your salary is probably lower than it will be later in your career, but you can probably focus more on your future self than you will be able to in your thirties when you have a young family and a mortgage.
In your fifties, your children will – hopefully – be independent and you’ll ideally have paid your mortgage off, which gives you a chance to turbo-charge your savings plan to get you across the finish line and into the arms of your dream retirement.
The impact of time on your savings is highlighted when saving for your pension. Whilst a couple in their 20s will have to save just £131 a month to achieve a comfortable retirement, this increases to £198 for a couple in their 30s, £338 for those in their 40s, and £633 for a couple in their 50s, according to research from consumer group Which?.
Achieve your goals quicker
When it can take first-time buyers eight years on average to afford a deposit to buy a home¹, it’s important you’re doing the right things to help you achieve your financial goals and start early.
Whether you want to buy a house yourself, help your children on the housing ladder, save for your children’s education, or just like that feeling of potential a savings pot holds, you need to plan how you’re going to get there. It’s not going to be a walk in the park, after all – but it will be worth it.
Before you look to the financial markets to protect your money and grow it for the future, it’s important that you’ve paid off expensive debt and got three months of outgoings saved in an easily accessible account – you never know when a costly surprise is around the corner.
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Once you’re in this position, it could be time to make your money work harder for you on the financial markets.
You need to know what you’re saving for and when you’ll want your money before you start investing – this will influence your investor profile and outline the most suitable investments for you.
Invest for generous tax incentives
Knowing what you’re investing for will also help you decide the most appropriate product to use to help you benefit from generous tax incentives.
Whilst a stocks and shares ISA allows you to invest up to £20,000 a year in a tax-free wrapper, a defined contribution pension gives you tax relief relative to how much income tax you pay – this can be 40% if you’re a higher rate taxpayer.
What you invest in will partly depend on your time horizon, as this will seriously impact how much risk you can take with your portfolio. Before you switch off at the mention of taking risk, remember that the financial concept is very different to what it’s like in the real world.
Risk and return work in harmony; the more risk you take with your money, the higher the return you can expect – although the further your investments also have to fall. The further away your time horizon, the longer your investments have to recover if they suffer from any short-term fluctuations.
Sleepwalk to success
It’s important to develop a regular savings habit, and you can set up a standing order or direct debit so you have no excuses for forgetting.
Not only is your money invested for longer than if you saved up to invest a lump-sum, which means you can benefit from compound interest, but pound cost averaging can also help you maximise your returns.
Instead of depending on the price of an asset when you decide to invest your money, you can smooth out the amount you pay for an investment over the long term. This can lower the average amount you pay and help maximise your returns.
Whether it’s about your diet, health, or financial wellness, life is about balance. Whilst you need to prepare for your future, there’s no point in giving up all treats for the current you – unless you really want to.
Life is never perfect, either. At times, priorities will compete and you may have to delay achieving your goals by a month for something that is present and more urgent. Don’t give yourself a hard time, just do what is right for you and your family.
Five tips to please your future self
Here are five tips to ensure you’re preparing for the future you really want today.
- Understand what you’re saving for and when you’ll want your money
- Set a realistic budget and stick to it as much as possible – it will be worth it in the long run
- Look to offset the impact of inflation with a globally diversified portfolio that reflects your investor profile
- Invest a little and often to help make your money go further
- Make the most of tax incentives with an ISA and SIPP