By Andy Lymer, Professor of Accounting and Taxation and Director of the Centre on Household Assets and Savings Management (CHASM) at the University of Birmingham
The third Monday of January – deemed ‘Blue Monday’ – is called by some the most depressing day of the year, with the excitement of Christmas over, poor weather, and all those credit card bills arriving from Christmas!
However, at this time of the year we also traditionally think ahead about what a better version of ourselves might look like. I’d like to suggest developing a savings habit as something we should all consider as part of our New Year resolutions – one that you can keep though!
Our research at CHASM shows that year after year our savings behaviour as a country is behind that of others in Europe and other developed countries with similar levels of wealth. Over half of those aged 22-29 in the UK have no savings at all – we desperately need to save more as a country.
If you have debt that is causing you a problem (that is keeping you awake at night and that you are struggling with emotionally or practically) then it is clearly right that you use whatever cash you can to pay that debt – even despite what I say below. If you don’t have any spare cash to pay back your debt or save, then I strongly advise you to go seek help now rather than try to fix this yourself. Any one of the large debt charities (National Debtline, Citizens Advice, Stepchange or CAP) will be able to help. You are not alone facing this challenge – Stepchange alone get a call from someone every 48 seconds!
However, if you have debt that isn’t unmanageable, are you a regular saver? Even small amounts of savings are very likely to benefit you. Every bit you can set aside helps.
MoneySavingExpert.com’s advice is that if you have any debt you should pay that back before you start to worry about saving. Usually, I agree with their advice however, not entirely on this occasion. They argue that as debt is always more expensive to service (paying back the interest on debt) than the interest you get on your savings, you should always pay that back first before you look to save. In pure cash terms they are right, but this advice doesn’t take into account what research suggests is the psychological and even physiological benefits of having even small amounts of savings. I think better advice for most people is that they should try to create some savings, maybe just £100 to start with as a goal. However, if you are in significant debt perhaps don’t look to grow larger savings than a small buffer, and pay down that debt instead. However, evidence suggests holding at least some savings makes a key difference to people’s wellbeing more generally.
Steps to saving
The first step for your new saving habit resolution is to consider opening a new savings account to start to build a small sum of money in which can then be used to dip into for when unexpected costs arise. Perhaps your kid’s school shoes don’t last as long as you expect (when do they!) or the car needs repairs just when you hoped it wouldn’t. Do put it in a different account to your main bank account however, as this really helps avoid dipping into it to cover every day expenses.
If you can set aside £100-200 as a buffer to pay for unusual expenses (perhaps working up eventually to £500 if you can afford it as that sum should cover most one off unexpected financial shocks most people face), then without having to borrow money from family, extending your credit card loan/overdraft (now becoming a fairly expensive way to borrow with newly advertised rates of >35% or so a year), or using other high interest rate sources, you will be able to pay for many financial ‘surprises’ beyond your usual bills.
Beyond this, if you can afford it, and are actively paying back any debt you have, it is time to start having money work for you not against you. What would you like to be able to afford to buy? Start saving for it. Positive goal setting is a really key motivator to creating a savings habit and sticking with it. Again, put the money saved into a different account to the one you use each day for regular expenses as this really helps reduce the urge to dip into it.
Help to save
Where should you save? I can’t provide specific advice on what is likely to be best for your personal circumstances, but if you receive Universal Credit I very much encourage you to check out the Help to Save scheme administered by HMRC (who run this scheme on behalf of the Government). This scheme matches 50p for every £1 you put in – a 50% return! See full details on this scheme on the Government’s website, or you can download the app on the App Store or Google Play Store.
If you aren’t a Universal Credit recipient, then I would strongly suggest, in addition to looking for traditional bank and building society options, you should also look at your local credit union. You can find out more about credit unions on the Money and Pension Service’s website. Credit unions operate locally and can provide a personal service to you that isn’t always matched in larger financial institutions.
Debt and employment
What else do we need to do to help people save more generally as a society? I think it is time to look at how employers can help with this challenge. Maybe an extension of the way we are now all more strongly encouraged to save for our retirement income by auto-enrolling us into scheme unless we opt out? Could such a scheme be extended to shorter term savings by perhaps having your employer put some of your salary or wages automatically into a savings scheme on your behalf?
Of course this would only help those in employment, so maybe there are other trusted agencies that could be enabled to help beyond traditional financial service providers who haven’t addressed this lack of savings issue. Credit unions are much better established in other countries and perhaps the UK could benefit from developing further the provision they offer here? Similarly, perhaps local councils could help directly or in a signposting role perhaps? Clearly, it seems time to think more imaginatively about how we support savings in the UK. In our research in this area, we have suggested other ways in which we could all be helped to save more as part of our ‘Saving for all’ project.
Therefore, if you can afford to save, even if only small sums, do get at least a small buffer put aside to help give you improved ability to face unexpected financial events. Once you have this, and if your incoming cash allows it, why not start making saving a regular habit? Set yourself positive goals to save for to motivate you to develop this habit. In either case, make sure you put your savings in a different place to your regular day to day money. It really does work to help you think twice about dipping into it. Savings aren’t a magic bullet to an carefree life but they really help you build resilience to cope with the financial challenges life throws our way from time to time.
- More about Professor Andy Lymer at the University of Birmingham
- More about the Money Advice Service
- More about the ‘Help to Save’ scheme
- More from the Unfiltered series
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Listen to the full conversation between Andy and Joanna Elson of the Money Advice Service in our latest episode of Unfiltered:
Or you could just campaign for higher wages / benefits, free education, lower interest rates on credit and to budget for lower profit margins worldwide. It would be so much easier for poorer people to budget then. Budgeting skills are good to have to keep expenditure in perspective, but perhaps we should be asking bigger, wider questions about why so many more people are in debt compared to their parents and grandparents who didn’t need to be ‘rehabilitated’ (as if they were some criminals). Doesn’t this smack of blaming the ‘undeserving’ victim?