Short answer: as much as you can afford. If you’ve got money left over, or you can afford to make cutbacks, or you have a sudden windfall and nothing to do with it then… You should be saving.
Nobody has ever looked into their savings account and worried that they might have too much. On the flip side of that is the fact that bills and living costs have to come first. If putting the recommended amount of money into your savings account causes you to miss a bill or dip into your overdraft, then it’s going to cost you in the long run.
All that said, we know that it can still be helpful to have a benchmark for your savings pot – and understanding the current expert opinion on how much to save can help you evaluate your own financial situation and make financial decisions.
Your Emergency Fund
First up, the emergency fund. Most advice suggests that this should be your first priority for savings: only once you’ve built up a reasonable backstop for emergencies can you start to save for fun things like holidays. What people don’t agree on is how much you need. On the extremely cautious side of the spectrum, some experts say that you need six-months’ worth of salary stashed away in case of redundancy.
On the other hand, emergency savings are typically stored in easy access savings pots with low interest rates. This means that some people say it’s better to only stash away the bare minimum – maybe as little as one month’s wages. To decide what’s right for you, you need to consider the kind of emergency expenses that are likely in your life. If your job is precarious then building up a bigger emergency fund is important. If you are relatively secure in other ways, you could consider saving less. Whichever way you look at it, we think three months’ salary is a good target to work with.
A House Deposit
Last year, the average first-time buyer deposit in the UK was £32,841 (according to stats from Halifax). While this amount is probably skewed by the particularly high prices seen in London, it still reflects the relatively large fund that you’re going to need to build. Assuming an interest rate of 1%, it would take nearly five years to build up 30k by putting away as much as £500 a month. Remember that Help to Buy ISAs are also available, and with these the government will contribute £50 tax-free for every £200 that you save, but you can only save £200 per month.
Working out how much you need to save for retirement can be tricky, but there are several retirement lifestyle calculators online that will help to calculate how much you need to save to afford the kind of retirement that you have in mind. Right now, anyone in employment in the UK should have a pension fund: if you decided to opt out of the auto-enrollment scheme that your employer provided, then you need to make sure that you have your own private pension set up and, ideally, that you’re saving as big a percentage of your income as you can afford.