How To Save Money Every Month

For the time-poor and those with a nervous disposition towards budgets and spreadsheets, here is a really simple way of structuring your finances so that you can save money every month, without getting bogged down in too much financial flip-flap.

Following the example below, slice up your monthly post-tax income into five easy-to-manage areas:

Spend & Save Profile

Essential Spend

This covers the key costs that you cannot avoid such as mortgage, rent, utilities, insurance, commuting and groceries (click here for more examples of essential spend).

The key focus is to spend as little as possible on essential items, either by finding cheaper alternatives or by getting a better deal.

I’ve set an ambitious target to ensure expenditure on essential items does not go beyond 50% of your monthly budget.  This may not be possible for everyone, especially those who have large mortgages or children to worry about, but if you cannot get within 50%, don’t be disheartened, just work out what percentage of your monthly income goes onto essential items and then split the remaining amount proportionally amongst the other four areas.

In this example a couple with a joint monthly income of £3,000, should aim to keep their essential spend to within £1,500.

The ultimate money saving ideas page offers plenty of tips on finding ways to reduce your essential spend.

Splurge Fund

This is your non-essential spend or fun money that you use for socialising, hobbies or simply to buy that must-have gadget or pair of shoes.  Even the most frugal saver needs to have a bit of fun and allowing yourself a fixed budget to get your dose, helps to ensure you don’t go overboard and waste your spare cash.

At 15%, a joint monthly income of £3,000 would allow our couple £450 to splurge on whatever they choose.

Pension

Ideally you should be looking to generate multiple sources of income to fund your latter years, with a pension being one of the key components.  In addition to ring-fencing your future savings, pensions offer generous tax-breaks and you may be lucky enough to have your contributions matched by your employer, which will really boost your savings.  Find out more about the benefits in this post – Why I have a pension.

Smart savers will also appreciate that starting a pension as early as possible, maximises the benefits of compound interest – one of the key rules of financial freedom.

10% of £3,000 is £300 paid into the pension pot every month.  If the employer’s of our couple match employee contributions like-for-like, they would be effectively saving £600 a month.

Emergency Fund

Keeping an emergency fund is almost like operating your own little insurance policy to provide a ready source of cash to pay a plumber to fix a burst pipe, a mechanic to repair a broken down car or to temporarily cover your expenses in the event of redundancy.

Most financial experts recommend that an emergency fund should cover three months worth of expenses, but the size of your pot will depend on your own perception of risk (and the number of emergencies you have!).

Keeping you emergency fund in a separate account to your main current account, avoids confusion and reduces the risk of spending it.  Automating payments into the account you use for your emergency fund at the start of the month also ensures consistent saving.

Shop around to find a high interest savings account (very rare nowadays!) to house your emergency fund.

5% of £3,000 is £150, so in order for our couple to save three months worth of essential expenses (£1,500 x 3 = £4,500), they would need to be saving for two and a half years.  Once the target of three months expenses is achieved, they can decide whether to continue saving into the emergency fund or to re-direct the cash to another savings pot.

Tax Free Savings & Investments

Follow the example of the rich and preserve your wealth by legally taking advantage of the system and minimising the amount of tax you have to pay.

In the UK, savers and investors can use a tax-free wrapper known as an ISA, which ensures that all interest and capital growth derived through their savings and investments remains tax-free.  This provides a significant benefit in terms of growing wealth, but it is surprising how many people still fail to take advantage of ISAs and other tax-free investments.

Again, setting up a standing order to automatically pay money into your ISA at the start of the month ensures consistent saving and reduces the temptation to spend it elsewhere.

Saving 20% of £3,000 (£600) each month in a tax-free ISA, will provide annual savings of £7,200.

Pay Off Debts First

The eagle-eyed amongst you will probably have noticed that this post has so far not mentioned anything about debt repayment (apart from mortgage repayments in essential spend).

The reason for this is that it makes little sense to save and invest money if you still have short-term debts, as the interest charged on debts is normally much higher than the interest and returns paid onto savings and investments.

Therefore it is better to focus on repayment of short-term debt (credit cards, bank loans, hire purchases agreements, etc) as quickly as possible and then begin saving and investing.