Saving

Most people know that saving money is a good idea.

The difficult part isn’t starting. It’s sticking to the habit.

Putting money aside once is relatively easy. Continuing to save month after month, while resisting the temptation to dip into your savings, is much harder.

Fortunately, one simple change can make that much easier.

Money is much easier to save when it has a purpose

Many people keep all of their savings in a single account.

There’s nothing wrong with doing this. In fact, it’s how many people begin.

However, as your savings grow, it can become harder to think of that money as being “for” anything in particular. Instead, it can start to feel like a pot of money that’s available if you fancy treating yourself or buying something unexpectedly.

Now imagine your savings are organised into separate savings pots.

• Emergency fund
• Holiday
• Christmas
• Home improvements
• Annual insurance
• New car

The amount of money hasn’t changed.

But psychologically, it feels completely different.

Your holiday pot no longer feels like spare money. It feels like your next holiday. Your Christmas pot feels like Christmas. Your emergency fund feels like security.

Giving each pot a clear purpose makes it much easier to resist spending the money on something else, helping you maintain your saving habit over the long term.

That’s why money is much easier to save when it has a purpose.

Many banks offer savings accounts, but digital banks often make this approach much easier by allowing you to create and name multiple savings pots within a single app. This makes it simple to organise your money around different goals without needing multiple accounts.

Your most important savings pot: an emergency fund

If you’re building your savings from scratch, your first priority should usually be an emergency fund.

An emergency fund is money set aside for unexpected events, such as:

• Your boiler breaks down.
• Your car needs an expensive repair.
• An appliance suddenly needs replacing.
• You unexpectedly lose your income for a period of time.

The purpose of an emergency fund isn’t to make you richer.

It’s to stop an unexpected expense from forcing you to borrow. Instead of relying on an overdraft, credit card or loan to cover the cost, you already have money set aside to pay for it.

Knowing that money is there if something goes wrong provides more than just financial security. It also provides confidence and peace of mind, because one unexpected bill is far less likely to derail your finances.

For many people, this psychological benefit is just as valuable as the money itself.

As a general guide, many financial experts recommend keeping around three to six months’ essential living expenses in an emergency fund.

Other useful savings pots

Once you’ve started building an emergency fund, you can create separate savings pots for any future spending you expect.

Common examples include:

• Holidays
• Christmas
• Home improvements
• Replacing your car
• Annual insurance payments
• Family celebrations

There isn’t a right or wrong number of savings pots.

The important thing is that each pot has a clear purpose and reflects your own goals and priorities. The amount you save in each pot is entirely personal and should simply reflect what you’re saving for and when you’ll need the money.

What if my goal is to build wealth?

Savings accounts are an excellent place to keep money for short-term goals and emergency funds. They’re safe, easy to access and can earn interest (see Interest).

However, if your goal is to build wealth over the long term, savings accounts have important limitations.

The interest you earn may not keep up with inflation, and you may also have to pay tax on some of the interest you receive.

This means your savings may grow in pounds and pence, but if inflation is higher than the interest you’re earning, the spending power of your money can actually fall over time. In other words, your account balance may increase while the amount it can actually buy decreases.

That’s why many financial experts recommend using savings accounts for short-term goals and emergency funds, while investing is often a better option for building wealth over the long term.

In simple terms:

• Savings are for short-term goals and financial security.
• Investing is for building long-term wealth.

Key takeaways

• Maintaining the saving habit is psychologically much easier when your money has a purpose.
• Separate savings pots help you organise your money around specific goals.
• An emergency fund should usually be your first savings priority.
• Savings are best suited to short-term goals and financial security.
• Investing is generally a better way to build long-term wealth.