Savings under pressure – how much you need and ways to save more

Money is likely to be tighter in the next couple of years, which could make saving more of a stretch. It means it’s worth taking stock of your savings right now, while there’s time to build some resilience against any nasty surprises.

The Office for Budget Responsibility (OBR) report, issued alongside the Budget, highlighted that it’s not expecting real wages to grow at all next year, or the year after. Even after that, it’s likely to barely muster half a percentage point of growth each year. A big part of this is the fact that companies are making up for higher employer National Insurance costs by keeping a lid on wage rises – rather than taking a hit on profits.

Meanwhile, the cost of essentials is expected to rise significantly – especially energy costs – so the OBR expects real household disposable income to drop. It’s not expecting consumption to grow, but to keep it at a similar level people might need to cut back on savings. In reality, because there’s no such thing as an ‘average person’, those with more wiggle room may save slightly less and those on tight budgets could end up eating into existing savings, while those without any savings to fall back on risk running up debts.

With all this potentially looming on the horizon, it’s worth taking stock of how robust your emergency savings safety net is right now, and whether you need to take steps to beef it up before life gets more expensive.

As a rule of thumb, while we’re working, we need enough emergency savings to cover three to six months of essential spending – rising to one to three years’ worth in retirement. What people spend, and what they consider essential, will vary dramatically, but you can use averages to give a very rough idea.

Family spending figures in June from the Office for National Statistics (ONS) showed the average household spent £641 a week (£2,778 a month) on things like mortgages, household bills, insurances, tax, communications and transport. If we assume that cost-cutting within these categories can trim 20% off the cost, that’s £2,222 a month. Someone with these costs would need an emergency fund of between £6,666 and £13,332 to meet the three to six months rule. Clearly these are estimates based on averages, so it’s worth doing the sums for your own spending.

If you do the maths and you’re falling short, it’s not worth waiting until your finances are in better shape before you get started, because money is going to get tighter before things get better. By this stage, you will have cut all the easy costs, but there may still be some things you can do.

Given you’ll be working hard to squirrel money away, it’s important that your savings are working just as hard as you are. Emergency savings should be in an easy-access account so you can get hold of them quickly. Not all easy-access accounts are built the same, because many of the high street giants are currently offering around 1% in their branch-based accounts that are open to everyone, whereas the rates at newer online banks and cash hubs are working much harder.

It makes sense to choose an account which allows for unlimited withdrawals without a penalty, so you’re not punished for needing your money. Also consider how often you’re willing to switch when you make a decision about whether or not to go with an account with a short-term bonus. Finally, you could consider whether a Cash ISA makes sense, particularly with the tax on savings interest set to soar.

At the time of writing, you can make 5% for six months in a savings account with LemFi, but then the bonus runs out. Otherwise, you can make 4.57% with Oxbury Bank.

Once you’ve built up your emergency pot, it’s also worth considering investing for the long term. Over time, that money has the potential to grow to a more substantial pot and provide an even more stable financial cushion.

This could be through a Stocks and shares ISA if you think you may need to access the money, or a SIPP if you’re building financial resilience for retirement – as you can’t access your private pension until age 55 (rising to 57 in 2028). But any investment growth or dividend income over the years will be protected from tax in either account.

Extra ways to free up cash for savings

If you haven’t tried haggling to bring down the cost of bills like media packages and broadband, then it could be worth trying. You may also find there are deals available for switching to a different provider.

It may be worth joining online groups devoted to the art of saving money. Communities of deal hunters and cost savers get together to share handy tips. There will always be extreme money savers who will go to the ends of the earth for a bargain. Don’t be put off by how hard work that appears to be, because there are some easy ways to save too.

Check for recommendations of money-saving apps. This can include things like Too Good to Go, which offers cut price mystery food packages at specific times of day – often just before closing. There are also cashback apps, which effectively offer money off and cashback on the things you were going to buy anyway. They can be particularly rewarding at certain times of year – like when you book a holiday or start buying Christmas presents.

Tackling food waste can also be a great way to save. According to the Waste and Resources Action Programme, we throw away an average of £1,000 per four-person household per year, so it can help to keep a close eye on what’s in the fridge and the bread bin, because making good use of the freezer can reduce that closer to zero. Avoiding waste tends to start before you head to the supermarket – with a quick check of what you have, a list of what you plan to eat, and a list of what you need.