As incentives go, current interest rates don’t exactly have much in the way of motivation to offer. Even after years of putting cash aside you’re not likely to be able to grow your savings pot with a current Bank of England base rate of just 0.25%. Perhaps unsurprisingly then, the Office for National Statistics (ONS) recently revealed the savings ratio in the UK had fallen to a record low. The savings ratio is the proportion of disposable income in the UK that is channelled into savings. In May this year the ratio was down to 1.7%, from 3.3% in the previous quarter – so for each £100 of disposable income we are saving on average just £1.70. Millions of people have virtually no savings at all.
Why is the savings ratio so low?
A number of reasons have been put forward to explain why Brits are no longer channelling money into their savings accounts. The first of these is that there is very little incentive to do so with savings rates so very low. The second is more unnerving – that there just isn’t the available cash to save. So are we all so strapped for cash that we can’t put anything aside for the future?
Saving is essential for everyone
There’s no doubt that economic pressures, inflation and a mismatch between the average annual wage and factors such as house prices has resulted in budgets being seriously squeezed. But there are some very good reasons why, no matter how much income there is, saving is a really good idea.
An emergency fund. If you’ve got enough cash to cover your income and expenditure and you’re feeling pretty comfortable with life it can be tempting to assume that you don’t really need to save. However, life has a habit of throwing a spanner in the works when we least expect it. Illness, redundancy, repairs and accidents can all occur when you least expect them and having savings provides a buffer against the worst that could arise.
Retirement saving. A 2017 survey found that 1 in 5 British workers don’t have anything saved for retirement. This could mean that a fifth of the population faces a retirement in poverty. Not only that but the same survey found that even those who had put money aside didn’t have a realistic grasp of how much the retirement they were hoping to enjoy would really cost. 80% of those with pension savings were unrealistic about the money they would actually need for retirement. The average British worker earns £31,493 and has £17,462 saved for their future. Many make the assumption that the state pension will bring in another £15,000 every year but the reality is that for most people this is more likely to be around £8,000. So, it seems we are all under a rather dangerous illusion about retirement, how much we’ll need and how much we’ll have. Which is why creating a savings account to pick up the difference between expectation and reality could change your life.
Buying a new car. Car ownership is on the rise in the UK and for the majority of people the only way to achieve that is with car finance. However, there are some real advantages to putting money aside for savings that you can use to buy a new car. The most crucial of these is that – as a cash buyer – you can seriously negotiate on the purchase price of the car. Car dealerships don’t get that many cash buyers these days and if you’re one of them then you have the upper hand in negotiations from the start.
Buying a home. Home ownership is tough in 2017 unless you already have a foot in the door. House prices are high, mortgage lenders are cautious and deposits of the size you’d need to buy in somewhere like London are hard to come by. However, home ownership still remains a great option for creating future security. It might not reap quite as many rewards as a great pension but it’s a roof over your head for as long as you need it. A deposit for a home is a great reason to start saving – the earlier you do it, the more opportunities you can create.
How to save better in 2017
Put a little aside each month – whatever you can afford, transfer it to a separate account as soon as you’re paid.
Open a LISA (Lifetime Isa) – if you’re under 40 the government will top up everything you save for a property or for retirement by 25%.
Cut back on expenses – if you need to create some room in your budget to start putting money aside then start by cutting back on non-essentials.
Look for some work on the side – there are many ways to earn a little extra cash these days and you can do this at a time that works for you.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley