Whether you apportion £20 notes into physical envelopes or use a number of different savings accounts, putting your money into different ‘pots’ makes saving more successful.
Behavioural science expert Neil Bage says this is due to a phenomenon known as ‘mental accounting’, whereby your mind treats money differently if you decide what it is for.
‘Give your money a purpose – like a holiday fund, an emergency stash or a “future me” fund – and you’re way more likely to actually save it,’ he says.
Technology makes pot-based saving easier than ever. Many banks and building societies allow you to have several different savings accounts and even to rename them so that you’re always clear about their purpose.
But how many pots should you have? And how much do you need to put into them?
Read on to find out how to apportion your savings and make every pot work hard for you.
A pot for…buying your first home
How much might you need? The average first homeowner puts down a deposit of £68,154, says UK Finance, voice for the banking and finance industry. Depending on where you live and the type of home you buy, the sum you need could be higher or lower.
Is help at hand? While many people might turn to the Bank of Mum and Dad for help with a home deposit, the government can also provide a helping hand.
The Lifetime Isa, or Lisa, allows you to put money away to spend on a first property with a bonus added from the government. As with any other Isa, the money you put in grows tax-free, and the government will add 25 per cent to what you put in.
There are restrictions. You can only use the money for buying your first home, not a subsequent one, and that home can’t be worth more than £450,000. You’re limited to putting £4,000 a year into your Lisa, with the government adding a maximum bonus of £1,000. If you don’t use the money for a first home, you can either use it for retirement by taking it out over the age of 60, or you can take it out but pay a penalty which works out higher than the government bonus.
You can save a bigger sum of course, in a fixed-term savings account, and the longer you are prepared to leave it, the better the interest rate tends to be.
It may be sensible to lock away some money in a fixed rate account in return for better interest rates over time.
Automate monthly payments into your house deposit pot, to ensure you meet your targets.
A pot for…retirement
How much might you need?
Most of us need to save into a pension for our retirement. According to the Pension And Lifetime Savings Association (PLSA) we’ll need a pot of between £330,000 and £490,000 to have a moderate retirement.
Is help at hand?
Those figures sound daunting but fortunately, unless you are self-employed, your employer will also pay into your pension, helping it to grow, while the taxman will work with you, too, by adding back the income tax you’ve paid on your pension contributions.
Making it grow
The earlier you start, the easier it will be. Having a pension scheme will ensure you get tax back and with employer contributions you’ll be able to benefit from compound growth over time.
A pot for…a big holiday
How much might you need?
The cost of a week in the sun has been rising faster than inflation, up to £1,166 for a week in Turkey all-inclusive or £914 for a week in Spain, according to Travel Supermarket.
Putting away money each month towards a holiday like this makes the bill less painful later. For a family of four, putting £333.33 a month into a savings pot would give you £4,000 after a year, while a single person might get away with £83 a month for a £1,000 holiday.
Is help at hand?
Regular savings accounts might give your holiday cash a boost. These offer a high interest rate for your savings in return for you putting away a certain amount every month. You are rewarded for consistency but can only put away a certain lowish amount – perfect for holiday spends as the accounts usually pay the interest after a year.
Making it grow
As well as using a Regular Saver account to benefit from interest, make sure you automate your payments, so you don’t forget one and you’ve plenty in your holiday fund when you come to book.
A pot for…Christmas
How much might you need?
We spend more than £774 a year each on Christmas, research from Yorkshire Building Society suggests. But many of us go into debt to pay for it and are still paying it off when the next festive season rolls around.
Saving in advance can take the sting out of it. You’d need to put £64.50 a month into a Christmas pot to cover this amount over a year.
Is help at hand?
Some financial institutions offer specific Christmas savings accounts, such as Yorkshire Building Society’s Christmas e-saver, which allows you to put away £150 a month and get five per cent interest.
Unlike Christmas savings schemes offered by supermarkets and other organisations, with a bank or building society your cash is protected.
Making it grow
As well as saving into your pot regularly, you could declutter unwanted gifts from last year on Vinted, eBay or Facebook Marketplace and add what you make to it.
A pot for…a wedding
How much might you need?
Figures from wedding planning website hitched.co.uk’s National Wedding Survey suggest the average cost of the Big Day is now £23,250, meaning a couple who want to pay outright must put away £1,162.50 a month over an average 20-month engagement.
Is help at hand?
The Hitched survey suggests that parents shell out £14,647 per wedding on average. But not everyone wants to turn to the Bank of Mum and Dad. An alternative is to cut costs by having a smaller do, holding your wedding on a weekday or choosing cheaper catering options.
Making it grow
Regular savings accounts may have limits that are too small for monthly wedding savings but whatever account you choose to save into, make sure you keep an eye on the interest rate and move your money if the rate drops.
Consider an account with a fixed rate to guard against sudden falls in the Bank of England interest rate, and if you can use your Isa allowance – currently £20,000 a year each – this will help ensure the taxman takes less of your wedding saving
