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Automate your savings

Saving money may not feel like your strong suit and it’s certainly easy to get off track and save less than you intended when you’re not consistently saving a portion of every paycheck. Automating your savings via a deduction straight from your pay could be just what you need to get your finances in shape to ensure you reach your savings goals.

Is it time to automate?

Whether you get paid on a weekly or monthly basis, you may have a hard time regularly setting aside money for a savings account. Many people fall into the habit of saving only what is left over after paying their living expenses and covering the cost of discretionary purchases. The challenge here is that you likely won’t have a consistent amount being deposited into your savings account every pay day, which means your savings contributions will be at best fairly unpredictable. If you fall into this camp, now may be the time to automate your savings.

Benefits of automating your savings

Automating your savings can turn your savings deposit into another monthly expense. This can help you prioritise your savings contributions, reducing the temptation to spend those funds without planning ahead and ensures that you pay yourself first on pay day and that you don’t forget to make the deposit into your savings account.

Some other benefits of automating your savings include:

Save time: One of the biggest benefits of automating your savings is that it will free up time. Turning your savings contributions into a recurring monthly expense means you don’t have to keep thinking about how much you should save, when to make the deposit or transfer and whether you will meet your savings goals by the end of the quarter or year. Automation gives you peace of mind that your savings are growing steadily with little to no effort on your part and you can focus on other things.Save more over time: You could end up saving more when money is automatically transferred into your savings account. Having your savings transferred as soon as your paycheck hits your bank account means you’re regularly getting a guaranteed contribution that doesn’t change from month to month.Get out of debt faster: If you’re determined to pay off credit card balances or other debts you could automate your savings into an account specifically for your debt. Then you can pay these expenses off in one lump sum when you’ve built up enough funds. The automatic deposit will help you stay on track, making it easier for you to pay off debts quickly so you don’t incur too much interest.

Steps to automate your savings

Automating your savings starts with setting a realistic savings goal by calculating how much you can reasonably afford to save each month. Once you have a grasp of your own finances you can then decide how aggressive you want to be with your savings goal.

For example, if funds allow you could start with 5 percent of your paycheck and then in time aim for 10 percent or even 15 percent if you want to be really aggressive with your saving.

The next step is to consider join a credit union such as TransaveUK where you can make a regular payment into a savings account direct from your pay (the minimum payment is £5 per month). You can then change the amount going forward whenever you want to in line with your financial circumstances.

Finally, be sure to track your progress after you automate your finances. It can be satisfying to see your savings account grow each month once you automate your savings and it’s easy to do this using Transave’s online account and app. Make sure you keep tabs on your running balance and avoid the temptation to ‘cash out’ before you reach your bigger goals.

Open Banking Explained

If you’ve recently applied for a Transave loan you may have been asked to share certain bank account information through Open Banking.

Open Banking is a term used to describe a set of technologies and standards which allow you to safely and securely share your banking transactions with a regulated third-party provider such as Transave. Importantly, Open Banking connects directly with your bank, meaning that we will never have access to sensitive information like your user names or passwords and will never ask for them.

Transave will however ask for your consent to access your transactions when you sign up to Open Banking and will then send a request to your bank, which will process it and share your details (you can withdraw your permission at any time). In theory you'll be able to share your data for any 'payment account' you hold including current accounts and credit cards, although the initial roll-out of Open Banking is just for current accounts.

So why might Transave need access to your banking transactions? It’s because although we carry out credit and affordability checks on all loan applications, we sometimes require a more comprehensive overview of your finances to allow us to properly assess your creditworthiness and suitability for a loan. For example, this could be because it’s your first application for one of our loan products and you don’t have a repayment history with us. Or alternatively you may have a ‘thin’ credit file with minimal credit history, which has adversely affected your credit rating.

What all this ultimately means of course, is that Open Banking technology provides Transave with an important additional method of ensuring that we don’t unnecessarily exclude members from credit, whilst still acting as a responsible lender.

Saving for the future

Saving regularly is one of the most important things you can do to improve your financial resilience because savings will provide a cushion if you have unexpected expenses or experience a reduction in earnings.

But what should your savings goal look like? As a minimum requirement most financial experts suggest setting up an emergency savings fund of between three to six months of basic living expenses.

In reality though, even if you know you need to money put aside for emergencies it may well be that you’re still not quite sure how to make it happen. Maybe you’re already operating on a tight budget or maybe you’ve tried making savings a priority before and failed?

So how do you manage to pay your monthly bills and still have enough left over to put aside for a rainy day? Here are six ways to build an emergency savings fund whatever your current income.

1. Save first, not as an afterthought

The first way to ensure you build up an emergency savings fund is not to base the amount you save regularly on much you think you will have ‘left over’ at the end of the month, but rather to ‘pay yourself first’. This means committing to saving a regular amount as soon as you get paid and before you do anything else.

Once this money is safely in your savings account, you won’t be tempted to spend it on all the other things that tend to crop up.

2. Set it and forget it

Take things further by ‘automating’ your savings to reduce any likelihood of human error (or weakness). A big advantage of saving with a Credit Union like Transave is that you have to commit to saving regularly either at source via payroll deduction or by an automatic transfer from your bank in the form of a Direct Debit.

3. Stash any windfalls

Resist the urge to automatically spend any extra lump sums that come in. If you get a windfall consider stashing it immediately in your savings account.

Since you weren’t counting on this money as part of your monthly budget, you’ll not miss it and it will help get you closer to your savings goal.

4. Slash your budget

Free up extra money for savings by taking a red marker to your budget and trimming as much as you can.

Do you really need all those satellite channels? Do you really need to eat out three times a week? Every bit you can slash from your monthly budget gives you more cash you can put toward your emergency fund.

For more information on budget planning see our article here

5. Increase your savings

Once you've got into the savings habit, look for opportunities to increase your contributions.

For example: If you’ve decided to save 10% of your monthly pay consider making a small increase and set aside 12% instead. It's likely you won't even notice the difference, and these small changes can really add up over time.

6. Keep saving beyond your goal

When you get started with an emergency savings account, it's great to have a goal. But what happens when you meet that goal?

By this point, it's likely that you've become accustomed to setting aside some of your income for your emergency fund. And just because you've met your goal doesn't mean you should stop saving. There's no such thing as having too much money saved for an emergency, so keep it up if you can.

The 50/30/20 Rule for budgeting

Most people save too little, and unknowingly spend too much. The 50/30/20 rule for budgeting is a way to become more aware of your financial habits and limit overspending and under-saving (by spending less on the things that don’t matter to you, you can save more for the things that do).

Because this is just a rule of thumb for planning your budget you’ll also need to supplement it with a system to monitor spending as outlined in this article.

What is the 50/30/20 rule?The 50/30/20 rule is a guideline for allocating your budget to three categories, ‘needs’, ‘wants’ and financial goals as follows:

50% to Needs

Needs are what you can’t live without, or at least very easily. They include things like:

Rent/Mortgage paymentsGroceriesUtilities, such as electricity and water

30% to Wants 

Wants are things that you desire but don’t actually need to survive. They might include:

HobbiesHolidaysDining outDigital and streaming services like Netflix and Amazon.

20% to Financial Goals

This category includes savings and money set aside for debt payments.

How to use the 50/30/20 rule

Calculate your monthly income. Add up how much guaranteed income you receive in your bank account each month.Calculate a spending threshold for each category: Multiply your take-home pay by 0.50 (for needs), 0.30 (for wants), and 0.20 (for financial goals) to see how much you should ideally spend in each category. Plan your budget around these numbers: Think of these three categories as “buckets” that you can fill with monthly expenses. List and tally your monthly expenses under the category each falls into and see if you’re spending less than the monthly targets you established in the prior step.Follow your budget: Track your expenses each month, and make changes where needed, in order to stick to your spending thresholds going forward

 

50/30/20 Rule vs. Other Budgeting Methods

The 50/30/20 rule of thumb isn’t the only game in town. Here are a few other budgeting techniques to consider:

80/20 Rule: With this method, you immediately set aside 20% of your income into savings. The other 80% is yours to spend on whatever you want, no tracking involved. 

70/20/10 Rule: This rule is similar to the 50/30/20 rule but you instead parse out your budget as follows: 70% to living expenses, 20% to debt payments, and 10% to savings.

Budget Planning

What sort of relationship do you have with your money?

If the relationship is long distance then there’s a real danger that you will never get on top of your finances. Instead, why not beat the fear by getting organised and creating a budget to see your money situation more clearly?

Creating a budget will create a strong foundation for your finances and allow you to manage your money, control spending, save more money and stay out of debt. Let’s face it without an accurate picture of what’s coming in and going out of your bank account it’s going to be impossible to manage your finances properly.

Six steps to creating a budget

Step 1: List your income Start by working out how much income you’re bringing in each month. To do this, add up all reliable sources of income, for example wages from a job and child support. The key word here is reliable, if you get cash from outside jobs or hobbies, but not on a regular basis, don’t include that in your budget.

Step 2: Add up your expensesSome of your monthly expenses will be fixed for example mortgage or rent, whilst others such as utility and grocery bills may vary. Firstly list all your fixed expenses and the amount of each expense. For the variable expenses try to determine the maximum amount you plan to spend in that category, for example you might plan to spend £400 on groceries.

Use your previous bank and credit card statements to help you figure out what you typically spend each month. Reviewing your previous spending can also help you uncover categories of spending you may have missed. Of course some of your expenses don’t occur every month but accounting for these periodic expenses in your budget can make it easier to afford them. Divide yearly expenses by 12 and semi-annual expenses by six to come up with the monthly amount to account for in those categories.

Step 3: Evaluate your spendingSome fixed expenses might be able to be adjusted, for example you might be able to get a cheaper broadband deal by shopping around. Variable expenses however are typically easier to adjust. You might want to use a “wants versus needs” analysis like the one provided by the 50/30/20 budgeting rule at this point. The aim will be to reduce or eliminate spending in those “wants” to make more room for the things you “need” to spend money on.

Step 4: Calculate your Net incomeNet income is what you have left over after all the bills are paid. You want this to be a positive number so you can put it toward paying off debt, savings, or other financial goals. Calculate net income by subcontracting your expenses from your monthly income and write down the number even if it's negative.

Step 5: Adjust your expensesIf your net income is negative it means you’ve budgeted to spend more than your income. You’ll have to correct this. Otherwise, you may end up having to use your credit card, overdraft, or other forms of credit to get you through the month.

Step 6: Track your spendingThroughout the month track your actual spending against your budget. There are free budget planning tools available such as Money Dashboard: https://app.moneydashboard.com/ or the Money Advice Service Budget Planner https://www.moneyadviceservice.org.uk/en/tools/budget-planner to help you do this.

The dangers of Payday Loans

It’s an easy scenario to imagine. You urgently need to borrow funds and a quick search online brings up loan ads with headlines like ‘Cash paid in 10 minutes, no credit history required’, so you apply and in no time at all the funds are in your bank.

So problem solved? Well yes and no. This type of short-term loan can be convenient and help you get to the next payday but also come with some significant disadvantages.

Cost

Payday loans are a high cost form of credit, with APR’s (the yearly interest payable on the amount borrowed plus fees) of anything up to £1,500%. As a result borrowers typically end up repaying a total of 1.65 times the amount they borrow* and because interest on Payday loans is normally calculated on a daily basis, borrowing can be even more expensive if borrowers choose to pay off over a longer time period.

Rollovers

75% of Payday loan customers take out more than one loan per year (the average number taken is six) so it’s perhaps not surprising that around 30% of these loans have to be re-financed or ‘rolled over’ because the customer cannot make repayments on time. This means they pay more interest on the loan and may also be charged additional fees with the end result that they can end up paying hundreds of pounds more than they originally intended to.

CPA’s

Some Payday lenders insist on a CPA (Continuous Payment Authority) before approving a loan. This means that the lender has access to take payments from the borrower’s bank account and the customer runs the risk of funds not then being available for other outgoings resulting in additional bank charges.

Credit availability

Taking a Payday loan will not automatically affect the borrower’s credit score as long as repayments are made on time. However loans are recorded on credit files and some lenders including a number of mortgage providers do not look on them favourably and may reject applications as a result.

Payday loan alternatives

If you absolutely need to plug a short-term hole in your finances payday loans are not your only option. For example depending on your financial situation arranged bank overdrafts, 0% credit cards and even standard credit cards (assuming the full amount borrowed is paid at the end of the month) are all going to be a cheaper way to borrow funds.

Many Credit Unions also offer similar loan products but at much cheaper rates even if you don’t have a five star credit rating. To look at a quick example if you borrowed £900 for seven months from a Payday lender** at an APR of 529.09% your total loan repayment would be £1,565.99. Borrow the same amount over the same period from TransaveUK (Instant Loan at 24% APR) and the total cost of your loan would be £973.43, a saving of £592.56.

*FCA survey 2020

** Cashfloat loan example 19/03/2021

Useful Links

It can be uncomfortable discussing money worries. However if you are struggling to manage your bills each month it’s important not to ignore the problem and instead to discuss your situation with someone who understands and can help.

Step Change Debt Charity

For debt advice throughout the UK phone 0800 138 1111 or visit their website

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Citizens Advice

For advice and information on debt and other topics, visit your local Citizens Advice Bureau or visit website

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