How to save for the future when cash is tight

With the cost of living continuing to rise, finding extra money to put towards your future may seem impossible. However, there is one way to stop rising bills scuppering your plans – and that’s to ensure you’re making the most of the savings you already have.

To help you get started, here are four steps to consider.

1. Ensure your long-term savings aren’t losing value

With inflation running at a 40-year high, money left in a cash savings account is at risk of losing its real value over time. This is because interest rates on cash remain significantly lower than the rate of inflation. Our analysis shows that over long periods, the eroding effect of inflation can be particularly severe. If, for example, you left £100 in a piggy bank and inflation averaged 2.5% a year, its real value would fall to just £53.10 after 25 years.

One way to shield your long-term savings from the ravages of inflation is to invest in the stock market. Although the stock market goes down as well as up, history shows that over periods of ten or more years it tends to perform more strongly than cash and above the rate of inflation. If you’re unsure how to get started, speak to a financial adviser.

2. Make the most of your tax allowances

There are lots of tax reliefs and allowances to take advantage of when you’re saving and investing. ISAs, for example, shield your investments from income tax and capital gains tax. If you already have a cash ISA, you could consider transferring this to an Investment ISA. Both types of ISA are tax efficient, but an Investment ISA also offers the opportunity for above-inflation returns over the long term. The fact that investment gains are tax free means even more of your money will go towards your future.

If you’re planning further ahead, a pension is a great way to save because personal pension contributions benefit from tax relief. If, for example, you decided to move £10,000 of your cash savings into a personal pension, you would receive a top-up of £2,500. This ‘free’ money from the government can really supercharge the value of your pension pot at retirement.

3. Look for a better ‘rainy-day’ interest rate

It’s really important to keep some ‘rainy-day’ cash set aside for unexpected emergencies, such as your boiler breaking down or a period of unemployment. This cash – we suggest the equivalent of six months’ worth of essential expenditure – should be kept in an easy-access savings account so that you can instantly withdraw it if needed.

Interest rates on savings accounts do vary, so make sure you shop around. A difference of 0.5% might not seem like a lot, but on large amounts of money it can have an impact. If you put, say, £30,000 in a savings account with a 1% interest rate, you’d earn £300 a year. If the rate was 1.5%, you’d earn £450 a year.

4. Track down old pensions

If you’ve changed jobs a few times throughout your career, you’ve probably accumulated several different pension pots. Some older pension schemes may have excessive fees or poor investment performance. By transferring them to a different scheme, you could end up better off financially.

You can track down your pensions by using the government’s free pension tracing service. A financial adviser can help you compare each scheme’s charges and performance, check whether they offer any valuable guarantees, and look out for large exit fees. Ultimately, they will help you understand whether it makes sense to consolidate your pensions into one pot and, if so, which one is best suited to your needs.

Next steps

When times are tough, it’s more important than ever to make the most of the money you already have. Investing and tax relief aren’t the easiest concepts to get your head around – and, let’s face it, not many of us have the time to become experts. A financial adviser can take away the stress of organising your finances, so you can feel confident you’re doing everything you can to build a secure financial future. For smart advice that’s tailored to you, speak to one of our financial advisers today.

The value of investments, and any income from them, can fall and you may get back less than you invested. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy.