As inflation persists and the cost of living continues to squeeze household budgets, making the most of your money has never been more critical. New data reveals a stark divide: while the average UK household holds over £35,000 in savings, one in seven has no savings at all, and 14% are already dipping into their reserves to cover daily expenses.
The Urgent Need for a Savings Buffer
Tafari Smith, head of savings at RCI Bank, notes that the current financial climate is forcing many to prioritise immediate needs over long-term plans. "The financial climate we are living in demonstrates more than ever that it’s important to save where possible – it means there is something to fall back on when things are stretched," he explains. Building financial resilience depends on your individual circumstances, but these four steps can provide a robust starting point for anyone.
1. Optimise Your Current Account
Your journey begins with your everyday bank account. Many current accounts pay minimal interest, while unauthorised overdrafts carry hefty fees. Switching to a better account can yield immediate rewards. For instance, you can currently earn £175 for switching to Nationwide’s FlexDirect account, which offers 5% interest and 1% cashback on debit purchases for a year.
Similar switching bonuses are available from First Direct and NatWest. Alternatively, opening a Chase account provides 1% cashback on spending and a linked savings account paying 3.5%. Crucially, you can hold multiple accounts to combine bonuses, such as taking the Nationwide switch offer and also using Chase for everyday spending.
2. Build a Rainy Day Fund
Once your current account is sorted, establishing an emergency fund is the next priority. This should be held in an instant-access savings account for liquidity, even if the interest rate is slightly lower. Financial planner Rosie Hooper of Quilter recommends saving three to six months' worth of essential outgoings to cover surprises like boiler breakdowns.
Rajan Lakhani, a money expert from the Plum app, advises continuing to pay into this fund, even if only a small amount. "Even the smallest amounts add up in time," he says. Many bank accounts offer linked savers, like Nationwide's (1.10-1.35%) or Chase's (1.5%). Chase also features a 'Round-Up' tool that saves your spare change into a pot earning 5%. For the best standalone rates, platforms like Moneyfacts can help; Marcus by Goldman Sachs currently offers a 3.75% instant-access account.
3. Lock Away Money for the Longer Term
With a safety net in place, you can focus on longer-term savings where inflation is the key enemy. Fixed-term bonds now offer significantly improved rates. For example, via Raisin UK, the Bank of London and the Middle East pays 4.15% for a two-year lock, while Gatehouse Bank offers 4% over five years. Both are Sharia-compliant, meaning returns are profit, not interest, but deposits are still FSCS protected up to £85,000.
It's also vital to consider your annual ISA allowance of £20,000 to shield interest from tax. Basic-rate taxpayers can earn £1,000 in interest tax-free outside an ISA, and higher-rate taxpayers £500. Leeds Building Society offers a two-year cash ISA at 3.7%, and Marcus has an Easy Access ISA at 3.75%.
4. Consider Investing for Growth
To truly combat inflation over decades, investing may be necessary. While values can fluctuate, historical studies like the Barclays Equity Gilt Study show investments typically outperform cash over the long term. Starting is easier than ever via online platforms, allowing you to buy funds and shares within a tax-efficient Stocks and Shares ISA or pension.
Nicola Cornish, a chartered financial planner at Fairstone, emphasises starting early with regular contributions and diversifying. "The cornerstone of any investment portfolio should always be a diverse range of assets," she states. Options include low-cost index tracker funds or ready-made portfolios from providers like Vanguard or BlackRock. For guidance, robo-advisers such as Nutmeg or Wealthify can construct a portfolio based on your risk appetite.
Emma Wall of Hargreaves Lansdown concludes that despite market volatility, "investing is the best way to secure your long-term financial goals." Crucially, only invest money you won't need in the short term, ensuring it complements your savings strategy for full financial security.
