Most people understand the importance of establishing a savings habit,
but it can be especially tough to do this when you’re on a tight budget.
When living costs are soaring and household finances are being squeezed, many people find they simply can’t afford to put money away.
However, even though it can be really tough to save if you don’t have much in the way of extra cash each month, it may still be possible.
Here are a few ways to start saving if you’re on a tight budget. Remember too that it’s worth seeing if there might be any ways to reduce your outgoings so you can save a bit more. You can find out more about how to do this in our articles How to save money – 21 best money saving tips and Seven ways to save on your household bills.
Automatic savings apps
One of the hardest things about saving is knowing how much to put away each month. However, there are some apps that can help you get started by calculating the savings you can afford and even make them on your behalf.
These apps are generally provided by online banks. The idea is that you give them access to your existing current account, and they automatically move a portion of your money into a savings account each week.
Some apps will look at your spending and calculate how much you can afford to save each week or month, and make an automatic transfer.
Others, such as Moneybox, ‘round up’ your purchases to a certain amount and if you want to, you can then transfer the difference into a savings account. So, for example, if you bought something worth £3.65 then an app that rounds up to every pound would save 35p for you (totalling £4).
The idea is that you will save without noticing any pinch to your budget (though you can withdraw your money or tell the apps to save less if need be).
However, you won’t always get the most competitive rate on your savings by using one of these savings apps, though there are some decent rates at present. If you want to use an app’s saving system but receive more interest, you could transfer the money you’ve saved each month into an alternative savings account with a better rate. You can find out more about some of the best available options below.
Your money won’t always benefit from the same protections as in a traditional bank. Some apps are covered by the Financial Services Compensation Scheme (FSCS), meaning you will be refunded up to £85,000 if the company goes bust while holding your money.
Some apps operate under an ‘electronic money’ licence, enabling them to hold your cash in a ring-fenced account with a bigger bank. In this case, if the app company goes bust, your money will be protected. However, if the larger bank goes bust, your money may not be protected, because it may not be considered a cash deposit, and the FSCS would have to decide on a case-by-case basis whether to compensate you.
Some of the best automatic saving apps include:
- Kroo
- 4.10% AER
- Covered by the FSCS
- No fees
- Spending insights and spare change round-ups
- Chip
- 5.00% AER
- Covered by the FSCS
- £0 – £5.99 fee per month
- Spare change round-ups and AI-powered automatic saving (45p fee)
- Plum
- Up to 4.59% AER
- Covered by the FSCS
- £0 – £2.99 fee per month
- Spare change round-ups and a variety of automatic saving options
- Moneybox
- 3.75% AER
- Covered by the FSCS
- No fees
- Spare change round-ups
(Rates correct at time of writing 29.10.2024).
Read about more of our favourite money-saving apps in our article 20 top money-saving apps.
Regular savings accounts
A regular savings account is a great way to build your savings over a short amount of time, thanks to the combination of limited time periods and competitive interest rates they offer. These accounts are designed to encourage consistent saving, and usually set a minimum monthly deposit (though this is typically quite low, as little as £1 in some cases, so can still suit savers who can only afford to put away a little each month).
Regular savings accounts tend to boast attractive returns, particularly as interest rates have soared in the past year. As they tend to run for short periods (such as one year), these accounts are a good way of generating a chunk of interest relatively quickly, which can then be transferred into a standard savings account paying a competitive rate.
Be aware that different accounts offer different levels of access to their regular savers – in some cases, you may not be able to withdraw any money until the end of the term, so make sure you have read the terms and conditions carefully before signing up, so you know what you’re getting into.
You can find out the best rates currently available in our article What are the best regular savings accounts?
Easy access savings accounts
If you want to save but are worried about needing to get hold of the money, an easy access savings account is a good option. Also known as instant access savings accounts, these give you the option to withdraw your money at short notice, meaning they are great for building an emergency fund.
Bear in mind that ease of access still varies between different instant access accounts. Some allow you to make unlimited withdrawals at any time, while some will only allow a few withdrawals within a set timeframe before you’re penalised. Make sure you read the policy carefully and choose the right account for you.
Top 5 Easy Access accounts
by Raisin UK
Interest (AER): 4.51%
Interest on £5,000:
+£229
Guarantee:
£85,000
Interest (AER): 4.50%
Interest on £5,000:
+£228
Guarantee:
£85,000
Interest (AER): 4.48%
Interest on £5,000:
+£227
Guarantee:
£85,000
Interest (AER): 4.20%
Interest on £5,000:
+£213
Guarantee:
£85,000
Interest (AER): 4.13%
Interest on £5,000:
+£209
Guarantee:
£85,000
Cash ISAs
Cash individual savings accounts (ISAs) work in a similar way to regular savings accounts, with the crucial difference that any interest you earn is tax-free.
Outside an ISA, you can earn up to £1,000 in interest tax-free a year as a basic rate taxpayer, and £500 as a higher rate taxpayer, under your Personal Savings Allowance (PSA).However, any interest you earn on money held in a cash ISA is tax-free and doesn’t form part of your PSA.
You can deposit up to £20,000 a year in an ISA (or across multiple ISAs). You don’t need to have thousands in order to get started though – many cash ISAs can be opened with a minimum monthly deposit of £1.
As with the other kinds of accounts we’ve mentioned, however, cash ISAs vary widely in terms of the level of access they offer. Some account providers withdrawals but only with a certain amount of notice, while some don’t allow them at all, so they may not be best for trying to build an emergency fund.
You can learn more about cash ISAs in our article How cash ISAs work and keep an eye on the best rates on offer each week with our article Best cash ISA rates – which cash ISAs pay the most interest?
Read more…
You can pick up more tips by reading our article How setting a savings goal can help you reach it, and learn more about how to put together an emergency fund in our article How to build an emergency fund.
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