Rainy day savings
Your first priority should be to accumulate a stash of rainy day money which can be used to meet unexpected bills and other emergencies. These are savings which you can also dip into when there are extra demands on your income, such as at holiday times. By having this money available, you are less likely to have to take on expensive short-term debt.
Rainy day savings also help protect you and your family by providing a cushion if you are unable to work for a short time due to illness or you lose your job and don’t find another one immediately. It is usually recommended that you have the equivalent of between three and six months’ income in your rainy day savings.
Saving for a purpose
The next type of savings is those for specific objectives such as children’s higher education, weddings and house deposits. It is often easier to save when you have a specific goal in mind and once again it reduces the need to borrow. Children contemplating a university education nowadays should be ready to shoulder £42,900* in debt at the end of it. Meanwhile, a decent-sized deposit is essential for anyone who wants to step onto the housing ladder, and the more you have the more competitively priced the mortgage will be.
Topping up your pension
Saving for retirement has now become a necessary objective for everyone and the younger you can start the better. In the past, many people were unsure of how much state pension they would get and were less inclined to save as a result. Many also enjoyed generous company pension schemes. State pensions depend on your national insurance contribution record. You will typically need 10 qualifying years to get any state pension and 35 qualifying years to get the new full state pension, which is currently £203.85 a week. You can check your state pension forecast here.
It is still important to contribute to a workplace pension scheme as your employer is legally obliged to contribute too. But often these schemes alone will not be able to provide as much retirement income as you might need.
For the self-employed who will get no company pension, saving for retirement is even more important. Don’t rely on selling a business as finding a buyer may prove difficult.
*Student loan statistics – https://commonslibrary.parliament.uk/research-briefings/sn01079/