How much should I save? And how can I save more? These are questions I hear a lot. We are all searching for someone wise to tell us how to be “better” with our money.
But these strange, frightening times demonstrate that no one can predict what the future holds, or tell us exactly what kind of financial safety net will make us feel less anxious about the coming weeks, months, and years. We have to work out our own priorities.
There are some rules of thumb, however, and methods that help us make these decisions, which I am finding useful to think about at the moment as a member of the precarious self-employed club. Hello no sick pay.*
*Since this article was written, the government introduced the Job Retention Scheme for PAYE employees and the Income Support Scheme for the self employed. Both of which offer 80% of your income up to a maximum of £2,500 a month. But eligibility criteria apply and many people have slipped through the cracks.
Financial advisers state we need three to six months of emergency money held in cash. This can act as a buffer if, for example, a global pandemic hits and we’re temporarily unable to work. If you are self-employed this might be used in lieu of pay if you’re off work ill, or to tide you over when jobs dry up.
Right now, this might feel unhelpful advice. Whilst the government has stepped in to help with many of us, it is too late for the very many people who are facing the loss of their jobs, but who have nothing set aside, often because the cost of living made it difficult to save in the first place.
For that group it is important to seek help as soon as possible, speak to your bank or landlord,don’t bury your head. The charities Turn2Us and StepChange have useful resources and help on how to manage debt and what benefits you might be entitled to.
But if you still have money coming in, though starting to save more might feel counterintuitive, set aside your own cash reserve if you can possibly afford to protect from the instant income shocks that might still be in store.
Those who don't have rainy day funds will often be forced to turn to expensive debts to bridge the gap, which debt charities, who suggest you aim for a safety net of at least £1,000, say is the most frequent reason people get stuck in spiralling high cost debt.
Banks are offering to extend overdrafts and credit card limits at the moment. These may prove unavoidable for those without anything saved up, but if you can, try to steer clear of getting into more debt at this time, at least before you’ve properly sat down and worked out your present and future financial position.
We often look at how much we spend in total and then see if there’s anything left over to save. There rarely is.
In uncertainty it is much more important to categorise your spending and identify what is unavoidable, and what you could trim back.
It might sound obvious but too few of us do the following: start by writing down all the money you have coming in, taking into account the likelihood of that changing over the next few months.
Then look at what you are paying out that is essential and you can’t at least imminently change, including mortgage or rent payments, bills, basic food needs, and any transport or childcare costs (though these might be temporarily diminished under rules to stay at home).
At the moment you may find you can trim back some of your unavoidable costs by taking a mortgage holiday, or asking for a rent pause or reduction. Be aware if you choose to do this that the repayments and interest are likely to be deferred rather than wiped out, so factor it into any considerations about your longer term plans.
The difference between your income and unavoidable outgoings is the sum you have to both spend on everything else, and set aside. This is the amount to examine and think about where you want it to go.
While social distancing means we will all be spending less, so long as you keep away from online shopping, there may be discretionary spending you could cut further.
My Netflix subscription is going nowhere, but now is the time to analyse your bank statement for other subscriptions you no longer use or don’t really need. Also spend some time looking whether you could reduce household bills, things like energy, broadband, mobile phone. You won’t be disconnected for any length of time if you decide to switch.
When working out where to trim your flexible expenditure and how much you can afford to save, think about the short and longer term and what you want to save for. Short term, how long could you last without, or on a diminished income? How realistic it is that you could be without money coming in for longer than two or three months? What would you do if you lost your job?
Then think about what else you want to prepare for. This crisis will, we hope, end one day, at which point you might be back to working out how you might afford a new car, a wedding, a holiday or a house deposit, or, though it is the last thing most of us are worrying about at the moment, how you might retire.
If you are already putting money into a workplace pension, or if you are self-employed and have a private pension of your own, try not to look too closely at it now for fear of passing out, but also don’t stop contributing into it unless you are in a dire financial situation, by which I mean you can’t afford those essential outgoings.
Workplace pensions have the benefit of a top up from your employer, you’ll be missing out on that if you decide to stop contributing. There is also the tax benefit whether you are employed or a freelancer, and the magic of compound interest that means the longer you leave your money in one place, the more it grows.
Otegha Uwagba, the writer and founder of the Women Who network, wrote last month that she has given herself a 20% pay cut during this time of uncertainty. She is set up as a limited company and pays herself a set salary each month.
But even if like me you are a sole trader, or you have a full-time salary, think about your money in terms of paying yourself. Could you live on 90% of your current income? What about 80%? If so, make it happen and save the rest.
The FIRE (Financial Independence, Retire Early) movement is based around the concept that you save like crazy in your twenties and thirties, as much as 50% to 75% of your earnings, until you have 25 times the amount you want to live off each year in your early retirement. This money is put in investments that track the stock market (though as the current market turbulence shows, there's no guarantee of return from any investment - as the boilerplate caveat goes; "your investments can go down as well as up, and losses may exceed deposits."), and you in theory can live off them for the rest of your life without having to be reliant on a salary.
For most people the idea you could afford to save half your earnings is ludicrous, but I like FIRE’s core message, which is to avoid “lifestyle creep”, that automatic thing we do of spending more the more we earn. Focus instead on what you want money for, define your own goals and work out how to get there.
In the difficult weeks ahead, reassessing what our financial priorities will become more important than ever.
[Cheeky note from the editor: Chip is a great way to kick off fixing up your finances, by automatically putting money aside without feeling it. The average Chip saver stashes away £1,800 a year without noticing.]
Remember your Capital is at Risk and past performance is not a reliable guide to future returns. The value of your investment can go down as well as up and you might get back less than you originally invested.