Your first step should be to clear most or all of your debts as quickly as you can. Then, you should find a way of budgeting to save a little each month. To get in the savings habit, aim to put aside a day’s pay after tax every month.
Your next savings priority should be to set up a little pot of money for emergencies in an instant access savings account. You may find it helpful to set up a standing order to your savings account on payday. That way, the money will be transferred on a regular basis before you've had a chance to spend it and you probably won't even miss it.
At a glance
Whatever crops up in life, whether it’s an unexpected bill, a sudden repair job or a shock redundancy, having some money saved up can help you take care of it. Ideally, you should have enough money set aside to cover you for at least three months, but exactly how much you save will depend on your own circumstances.
There are several different types of savings accounts. They differ depending on how much interest they pay and how long you will need to leave your money alone before you can claim that interest. But, if you think you might need to take your money out of the account at short notice and don't want to pay a fee or lose interest if you do, then an instant access savings account is a good choice.
So, if you have some spare money at the end of the month, then you should think about starting to develop some short-term savings habits.
Develop short-term saving habits
A Cash ISA is a good option as it is a tax efficient way to save. This is a savings account that pays interest tax-free up to specific limits. ISAs have been introduced by the Government to encourage more of us to save our money. You receive favourable tax treatment from the Government, so you don’t have to pay tax on the interest. Tax treatment depends on your individual circumstances and may change in the future.
You can use your ISA allowance to invest in a stocks and shares ISA which can be another way to save tax efficiently. Your annual ISA allowance currently enables you to invest up to a total of £20,000 in a stocks and shares ISA, or spread the full £20,000 across the four separate ISA types (stocks and shares ISA, lifetime ISA (up to the lifetime ISA limit), innovative finance ISA and cash ISA). Tax treatment depends on your individual circumstances and may change in the future.
The value of your investments and the income from them can go down as well as up and you may get back less than you originally invested.
You can often get extra interest if you are prepared to tie up your money for a set number of months with a 'term deposit' or savings bond. These types of savings products may offer a better interest rate but make sure you only put money in there that you won’t need in the short term.
Once you've got into the habit of saving for the everyday, it's time to start thinking about longer-term savings.
It's good to have some savings you can instantly access in case of emergencies. But, it’s also worth thinking about saving for the future and your retirement. Putting together a savings plan now will give you greater long-term security and help put your mind at rest.
You’re never too young to make a will. If you die without one, any possessions you own such as your house, jewellery, a car, artwork, etc, may be distributed according to the law rather than how you’d like. By sorting your will out early, you can also make sure your beneficiaries don’t pay more inheritance tax than necessary.
To make the most of your money, make sure you take advantage of your yearly tax-free savings allowance with an ISA.
You can help protect your family’s or dependants’ financial security by taking out life insurance. You could get a lump sum of money in the event of your death or if you’re diagnosed with a terminal illness, helping ensure that any outstanding debts such as a mortgage would be paid off.
More and more of us are now living longer, so at some point you may want to consider your income in retirement. Speak to your employer to see if they provide a pension or are prepared to contribute on your behalf. Some will match any money you put in yourself.