So, for those of us in the payday cycle of month-end … this week is the one we’ve been waiting for!
Whilst this blog is originally posted in the lead up to Christmas (this payday has got to last me), there are not many months which don’t involve one of: a birthday, a holiday, a seemingly one-off purchase and an unknown problem.
With that in mind, it is important to try and automate your savings.
Recently, Nationwide Bank have launched a huge advertisement campaign, “Payday = Saveday” with various slogans around the idea of it ‘being easier to save on the day you’re paid’, this is not just advertising jargon, it’s TRUE.
What does this mean?
Say you get paid £1,500 on 28th of November, you then automate a direct debit / standing order to your savings account for £150 to also go out on the 28th / 29th November. Therefore, by the time you have checked your bank account, you’ve already saved £150 and you can only see £1,350.
This is also the same tactic as often quoted book Rich Dad Poor Dad, “Pay yourself first”. As quite literally, you’re paying yourself before you pay bills, rent and memberships!
Obviously, you cannot overpay yourself or cut yourself so short that you end up dipping into it. Be sensible and calculate beforehand, how much you can afford to be tucked away immediately.
These numbers are an example and this represents saving 10% of your post-tax income. It could and should be more, do some simple calculations. Find out how much you actually spent last month. This means adding your rent + food + ongoing expenses. In conjunction with this, see if this is all completely necessary and average.
Is this a standard month? Did you go to the theatre / pub / football / shops more often than you normally would?
This exercise might even show you that you spend more on a certain item then you think you do. Once you have mastered this and have a sensible number to work with, there is a way you could build layers to this and saving in multiple places.
Saving in multiple places
So, we’ve been paid £1500, then we automatically saved £150.
Now, you know you need £600 for housing costs (rent or mortgage, this is an expense) and a further £500 for your monthly expenses. This leaves 1500 – 150 – 600 – 500 = £250.
The trick here is to AUTOMATE THIS TOO. Assuming you are being honest about your monthly expenses and have an emergency fund or a way of quickly accessing this money if you were to need it, you should consider saving this £250.
This is because, if it stays in your account, you are quite likely going to spend it. All it takes for you to overspend is to have too much money in your account. You told yourself that you need £500 for your ongoing monthly expenses, but you have £250 excess in your account.
Here, I tend to send a certain amount as a Direct Debit into a standard high-rate savings account, then a certain amount into a stock account, then a certain amount in a fund account. 3 different direct debits to my savings accounts. Something like 40%,20% and 40% respectively.
The pros to diversifying are for another blog post, but in the savings example, it just means I am psychologically less likely to dip in to what I have automatically saved if they are dispersed away via a direct debit.
I never thought I would be singing the praises of Nationwide Building Society (or any financial institution, for that matter). But, I think we can all agree on two things, 1) We have a savings / investment crisis, 2) The banks need to do more to help the public out. In light of this, hats off to Nationwide for this ad campaign.
We know that payday happens once a month, so there is no excuse to save the same amount… once a month.
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