Your Finance Travel Buddy presents One Simple Step

Happy Sunday fellow Financial Freedom Seeker

Mindset Moment

One Simple Step

The sentiment from Van Gogh above is central to personal finance. People often overwhelm themselves thinking that you need to have lots of money to make more money. In reality, small but regular savings / investments i.e. consistent habits no matter the size, yield great results.

Your One Simple Step this week is…

Save Small Amounts, Often

What does this mean?

Saving small amounts, often is pretty self-explanatory. Instead of focusing on saving large sums less frequently, it is easier to save a small amount consistently, like monthly.

The first place people often start with their personal finances is building an emergency fund. An emergency fund does what it says on the tin. It is a pot of savings designed to be easily accessible should an emergency rise. Whether it’s loss of employment, unexpected expenses – the idea is that if you don’t have other funds available, you have money saved that you can access easily.

If you don’t have an emergency fund, this could be a good place to start with your savings. If you do, then you can still save small amounts often which can be for a specific sinking fund e.g. holiday, car, wedding, education etc.

Why is this important?

The benefit of saving small amounts regularly is the concept of compounding interest. This is where you earn interest not just on your initial saving but on accumulated funds.

The below table outlines the difference between saving £1,000 per month at the end of every month vs saving £12,000 at the end of a year, where you have a 5% interest rate with your bank.

Here you can see that by saving small amounts, often, you earn more interest over the year. In fact, saving at the very end of the year results in no interest for that year vs saving throughout the year.

When you add long term consistency (see below tables) and look at the same savings pattern over 5 years instead of just 1, you can see that this small habit of saving more regularly, has increased your interest receipt by 24%

What a stark example of the long term benefits of small but consistent habits!

How do I implement this?

1. Decide how much you are comfortable saving each month

Your total monthly income less your total monthly expenses, including discretionary spend on leisure and entertainment, will give you an idea of how much you are able to save each month

💡Top tip: : where you are saving will help determine how much you should save each month. If you are saving in an instant access bank account, then you should be able to access that money if you need it. If you are saving in a fixed term ISA then you can’t access that money until the fixed term is over (without being fined) so you may want to save a little less than you think you can afford to in case you need to access money in an emergency.

2. Decide where the money is going to be saved

Kind of obvious but you will need a savings account to save into. There are lots of options out there, so you need to be diligent in deciding which savings account to open. Which savings account you open will also depend on what you’re saving for. If it’s for an emergency fund you will want one that you can easily access in an emergency, if it’s for a future purchase like a deposit on a house you might be happy locking the money away for longer for a higher interest rate.

💡Top tip: tap on the image below to watch a reel on things to consider when picking a savings account to build your emergency fund in

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Have a fabulous week ahead!

Until next week

Pernia | Your Finance Travel Buddy