Savings are a crucial part of our personal finances but trying to put money away each month is much easier than it sounds.
From an early age we are told to save our pocket money in a bank account and, as we grow up, this advice rarely changes. Conventional wisdom suggests people should save six months’ worth of expenses in case the worst were to happen. That is often the starting point of most financial plans.
Whether it be illness, a sudden job loss or the need to become a carer, there are myriad reasons why having a ‘rainy day’ fund is crucial, not just financially but also for peace of mind.
But it is not as achievable as the experts would make out and, in reality, is a daunting task.
The average UK household weekly spend stands at £630.30, the latest figures from the Office for National Statistics taken between April 2023 and March 2024 suggest.
Over six months, this equates to £14,959 (assuming six four-week months), although this figure will undoubtedly be higher at present after 18 months of above-trend inflation.
Even using the 2023/24 numbers, it would take someone putting away £50 per month some 25 years to achieve this goal.
Savings accounts will pay interest each year, lowering this timeframe, but returns often underwhelm and it can be easy to leave cash languishing in old accounts paying next to nothing.
Factoring in that inflation will increase monthly costs over time, it could take even longer if the interest rate paid is lower than the pace of price rises.
While it is easy to say ‘save more’, this is not always possible. I personally put away £150 per month and have been doing so for the past three years. Assuming interest rates and inflation broadly cancel each other out, it would take me eight years and four months to achieve the average recommended savings. So I would have at least another five years to go.
That is why I invest mine.
Investing is often seen as risky and I thought I was a bit crazy for putting my savings into funds.
But one independent financial adviser I spoke with recently said they suggest clients save their ‘rainy day’ fund through a stocks and shares ISA.
They argued that, while the money could be needed in the short term, it is more than likely not going to be required for a long time. Playing the averages, it is therefore better to have that money growing, rather than leaving it in a stagnant pot.
That is not to say people should have nothing in their savings accounts, but it offers a different mindset to saving.
While those with a more cautious nature should absolutely seek the safety of savings accounts, happy in the knowledge that the money is there but won’t grow, there are other ways of doing it.
In my case, I have two young children and I’m the sole earner in my household. I cannot afford to wait eight years to accrue my pot, but nor can I afford to save more each month. As such, I would rather make my money work harder.
My approach comes with risk, but rather than sleeping uneasily at night worrying I may never have a sensible savings pot, investing actually gives me peace of mind knowing I am working towards my goal much more quickly than through traditional savings alone.
And if markets plummet, I play the law of averages, knowing that it remains unlikely that my doomsday scenario comes around at the same time.