COMMENT
How 'Three Pots' Can Help You Save More

By Alison Hunt (TMFAlly)
July 21, 2005

How much money have you saved since the start of the year? A survey from CBI and PricewaterhouseCoopers in early July revealed the good news that in the first quarter of the year, private individuals were increasingly tending to save, rather than run up more debt. And the Building Societies Association has recently shown that the amount saved in June 2005 (after withdrawals) was £993m; almost double last June's figure of £554m and 15 times as much as June 2003's figure of £65m!

Clearly, after a few years of spend, spend, spend (and a few shock interest rate increases) we've sensibly decided to reign in our spendthrift ways and start stashing some cash away for the future. After all, who doesn't sleep a little more soundly at night with the security of knowing their family could get by financially, for a while at least, should something happen.

But how much are we actually saving as a proportion of salary? Do we save more as our income increases? Or do we save a set amount, and leave it unchanged for years?

Well, according to a recent survey by Birmingham Midshires, the latter may be the case. Those earning higher incomes do not tend to put away a greater proportion of their take home pay, with 15% typically being saved. And summer is taking its toll on our savings too, as we have saved less in the April June period than the previous quarter, undoubtedly due to funding holidays and increased socialising.

It's important to remember that although saving for short-term plans (such as holidays) is highly commendable, it's essential to put money away for the long term, too. With people living longer than ever due to advances in medicine, you could be looking at 40 years of retirement, a very long time indeed!

One way to tackle this is by earmarking your cash using a three pot approach. One metaphorical pot contains your retirement savings (pensions etc), the second your rainy day fund and the final pot is used for short term goals, such as holiday savings. If you set these three pots up and add to them, bit by bit each month, their contents will build up at a surprising rate, especially if you leave the interest in there to compound. Then, when it's time to pay for your holiday, you'll have squirreled much of it away already. But importantly, you won't be breaking into your rainy day or future 'pots'.

Of course, leaving your hard earned cash to fester in a pathetic account paying 0.1% would not be the brightest move! Find out the interest rate your savings earn by taking a quick look at your provider's website. If it pays less than, say, 3%AER, I would definitely consider moving as there are still many accounts paying 5%AER or more. The account(s) you choose to move to is up to you; some people prefer to use their mini-cash ISA allowance due to the tax advantages, and others prefer instant access savings. And if you don't pay tax, make sure you fill out form R85, or your interest will be taxed, regardless. Here are some of the best savings accounts and mini-cash ISAs on the market at the moment. And whilst you're at it, have you considered switching current account?

Additionally, if you get a pay rise, try to incorporate the percentage increase into the amount you save (or invest) each month. If you've set up a standing order to move a set amount of money to your savings account on payday, why not increase it, now? And consider doing the same for your pension? This is a similar technique as used by David Bach in how to become an Automatic Millionaire, and it's a very interesting one. Even an extra £20 saved will soon add up!

So organise your savings and make your money work as hard as possible then sit back and watch it grow!

You can find savings accounts paying 5%AER or more in our Savings Centre, and find out more about retirement in our Pensions Centre.