Imagine looking ahead to a future where you feel confident and in control of your finances. Many of us dream of achieving financial freedom but how can we get there? The key is learning how to save money for the long-term, rather than just thinking about your short-term goals. So, what’s the best way to get started? We’ve got you covered with a simple guide to help you plan and smash your long term goals.
When it comes to saving, the earlier you start, the better. Time and planning are your best friends when it comes to growing a nest egg and investing in your future. The more time you have, the smaller your savings contributions need to be, and the more options you have. So, what can you do to get the most out of your money? Let’s get into it.
Why save?
Before we talk about how to save money for your long-term goals, let’s talk about why saving is so important.
Having money set aside for the future can give you a sense of freedom and security, helping you approach curveballs with confidence. By setting long-term savings goals you can make your money work harder, and grow your savings even more.
What is a long-term savings goal?
Long-term goals might include things like growing a retirement fund, buying a house, or leaving a legacy for your nearest and dearest. You’re likely to work on these goals for at least five years — and sometimes even longer. On the other hand, short-term goals — like saving for a wedding, a big holiday or renovations — tend to be achievable within a few years. No matter your goal, making a plan and sticking with it is key to getting where you want to go.
What’s the best way to save money long-term?
Slow and steady wins the race. And the same is true when it comes to reaching your long-term money goals. Later on in this blog post, we’ll dig into some specific things you can do to grow your money — like investing your money or shifting it into high-interest accounts. But time is on your side, and even small habit changes can make a big difference.
Simple but effective behaviour changes — like rounding up pennies on your payments — can save you hundreds over a year, and you might not even notice it. Little changes like brewing coffee at home rather than buying take-outs could save you thousands over a decade. Here are four simple things that you can do if you’re wondering how to save money for the long term:
1. Set long-term savings goals
Setting clear, achievable goals can help you stay motivated, especially if you make them realistic. Be clear about how much you want to save, and think about the benefits that it will have on your life.
Be honest with yourself. How much can you realistically afford to save? Set regular milestones to boost your enthusiasm and motivation.
2. Create a long-term savings budget
So, now that you know how much you want to save, you’re probably looking for the
best saving plan for long term goals. Start by building a budget to make sure your goal is achievable. Write down your income, and total up your expenses. Most of your outgoings will fall into three categories: essential (like rent and bills), non-essential (entertainment and luxury), and savings (money you put towards your financial goals).
Armed with all this info, you can use the 50/30/20 budgeting rule to make sure you’re spending a reasonable portion of your income on each category. With this method, you would spend:
- 50% on your essentials
- 30% on non-essentials
- 20% to put towards your long term saving goals.
If you’re spending more than 50% on essential expenses, you can check price comparison sites to try and get better deals on your household bills. If your non-essential outgoings are more than 30% perhaps consider cancelling streaming subscriptions or eating out less. Squeezing these aspects can help you hit that 20% savings target without straining your finances and breaking your motivation.
If the 50/20/30 rule doesn’t feel like the right fit for you, explore more budgeting rules in this blog post.
Clear your high-interest debts first
If you have high-interest debts — like loans or credit cards — it’s often worth paying them off before you start saving. In general, debts accrue interest faster than you can earn it on your savings. So clearing that drain on your pocket can boost your savings power. Of course, it isn’t always easy to clear debts. But if you focus the 20% of your budget on paying them off you can start to make progress.
If you need a helping hand in making a plan to pay off your debts, you could chat to StepChange. As the UK’s largest debt charity, they offer free and impartial advice — both online and over the phone.
Grow your credit score
While it may not directly impact your savings, growing your credit score can have great long-term benefits. Your credit score is a number that summarises how creditworthy lenders consider you to be. When you apply for lines of credit, they usually run a credit check to decide whether to lend you money and what interest rates to charge.
When it comes to large financial commitments, like mortgages, getting better interest rates can make a big difference. A better credit score improves your chances of being approved for the best rates, so boosting yours could save you £1,000s over the years. Discover how you could grow your credit score by up to 300 points in just three months with Loqbox.
Improvements to your credit score are not guaranteed.
Save or invest: what’s the best saving plan for long-term goals?
There are times when saving and investing won’t be your main priority, for example, if you have high-interest debts. But saving and investing can be ways to make the most of your money over long periods. But is one better than the other?
What are the benefits of saving?
Saving simply means putting your money to one side, allowing it to grow over time as you add to the pot. Most bank accounts pay interest to reward you for saving with them. It’s added to your account as a percentage of the amount you save. Typically, you’ll earn more interest on your money when you save for longer periods.
Savings accounts offer either fixed or variable interest on your money. As the name suggests, fixed interest stays the same throughout the agreed duration, so you know how much you are going to get in the end. But it won’t respond to things like inflation. Variable interest, on the other hand, can increase and decrease alongside the Bank of England’s base rate.
You can find out more about the different types of savings accounts on our bank account cheat sheet.
A great benefit of putting your money in a savings account — rather than investing — is that it’s usually protected. Most savings accounts are covered by the Financial Services Compensation Scheme, meaning that a portion of your money, typically £85,000, will be protected if your bank or building society fails. This means that you’ll generally be able to withdraw at least as much money as you originally put in, plus any interest that you have earned.
If you’re willing to put your cash away for long periods in fixed-rate accounts and bonds, you might be able to get stronger interest rates.
If you want to make your savings work towards potentially growing your credit score, you can do that by getting started with Loqbox. As you make your savings payments we report them to the UK’s top three credit reference agencies (CRAs): Experian, Equifax and TransUnion, which can help grow your credit score.
Improvements to your credit score are not guaranteed.
Where to invest long term?
If you want to earn more interest than the rate of inflation, and potentially more than high-interest savings accounts, you could consider investing your money. While the rewards can be great, whether investing is right for you will often depend on your appetite for risk. Investing is always a gamble. It’s important to know that it is possible to end up with less than you started with.
However, if you already have enough money to cover emergencies, investing gives your money the chance to work harder for you and grow with far higher potential returns. When you invest, you can normally access your money within a few days, but it’s sensible to leave your investments to grow over several years to feel the benefits.
Read this blog to learn about the basics of investing, and discover five top tips for beginners.
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