Money Matters

Why You Need to Save

Saving is one of those things that always goes to the bottom of the list. New gadgets, holidays, cars and home improvements have a much greater priority, and they give a pleasurable sensation. It is hard to ignore the immense satisfaction of driving a new car or seeing a freshly decorated room. All these things are important but sometimes it is not practical to make that purchase right now for all sorts of reasons so money has to be put by. On top of these everyday requirements there are some big events in our lives which are difficult to fund from our regular income. These are things like weddings, a deposit for a house, building up savings to pay for a degree and of course, the biggest thing of all is retirement and health care in old age. Until you actually experience these events it is hard to estimate just how much you need. But the answer is usually more than you expect. A wedding, for example, could cost as much as £15,000, or more. A deposit of 10% on a first house will be of the order of £17,000. Not the sort of sum most of us have in ready cash. These expenses need to be planned and saved for over a number of years.

Retirement is a different kettle of fish altogether. When we think of how much we spend when we are working and then try and gauge how much we need to live on after we stop the numbers can seem dizzying. And that’s before factoring in things like inflation and changes to pensions. It has been clear for many years that governments of all persuasions, and companies, are getting less and less keen to keep us in the lifestyle we would like after we stop working. The state pension has been steadily reduced in real terms and company pensions are getting less generous as they move from paying out a fixed amount related to what you earned to paying out what you saved with them. And on top of these factors we are all living longer. That is good, but someone needs to pay for it. A 55 year old man today has a life expectancy of 25 years. In ten years time a 55 year old man will have a life expectancy of 27 years. Living off your savings for a couple of decades is going to require a lot of money, but how much?

Well one rule of thumb is that your retirement savings pot should be roughly equal to twice the value of your house. According to the Halifax the average value of a house in the UK today is £196,745 so that means the average couple needs to accumulate a savings pot of about £400,000 in addition to having bought and paid for the house. That sounds a staggering task. But help is at hand. And it is called compound returns.

Next Page