One of the most powerful concepts in personal finance is of ‘paying yourself first’.
It means making a commitment to yourself that regardless of personal circumstance you decide that every day you are working not only to buy things that you need today, like food and shelter, but that you are working to pay for your future too. In its most simple form it means you give yourself money before you give your earnings to anyone else.
One of the best ways to optimise your current account is to make this concept a reality by automatically transferring money by standing order every pay-day to another account, separate from your every-day spending account. To separate these savings you’ll need a savings account:
Instant Access Savings Account
There’s lots of different savings accounts available to choose from. ISAs, regular savers, fixed deposit, building society accounts (the UK equivalent of US credit unions) and instant access accounts. But don’t fall for decision paralysis when looking for the ‘best savings account’ –your first point of call should be the bank you have your current account with. Simply open an instant access ‘standard’ savings account with them. Here’s why:
It’s the easiest to set up
If you do not have a savings account at all, you should get one. Today. Opening up a savings account with your current bank is quick and easy, considering that the bank already has all your details on-file. You’ll also be able to easily get a standing order set up to feed the maximum amount you can afford into the savings account each and every month.
A layer of separation
The purpose of this savings account is not to earn interest on your savings –this will come later – but to provide a barrier between your pennies to spend now, and the pennies to spend at a later date. It might seem like a trivial barrier but it’s not. I’m reminded of a friend of mine who recently received a sizable inheritance. By his own admission he has quite a lot of debt yet as a result of the inheritance he found himself one day with thousands of pounds deposited into his current account.
Despite intentions to pay off his debt, the inheritance money stayed in his current account for several weeks. You can guess what happened to some of that money!
Whilst sizable inheritances and a strong income can help with growing your pennies, most money management is a psychological game. Take control by separating as much of your money as possible from your day-to-day spending account.
It is still accessible
Having a savings account with the same bank as your current account allows you to instantly transfer money from your current account to your savings account, and back again if you need it. When you first start developing a savings habit you are not going to be perfect. You will underestimate your spending and may need to dip into your newly accumulated savings. Having it readily accessible will give you the confidence to save as much as you dare, whilst also being comforted by the fact that if you really need to dip into your savings then you can, and quickly. When you are first beginning to save speed of access is important as other kinds of savings accounts either penalise you for withdrawing funds or have a delay between when you request your money and when you receive it.
Overall, a standard instant access savings account isn’t going to win any awards for good interest rates but setting one up is perfect for getting into the habit of saving. Instant access savings accounts are perfect for short-term goals when you expect to need the money soon but want the psychological advantage of keeping your savings away from your current account which for most of us has a nasty tendency to disappear to zero each month.
Other News
Magical Penny has launched a free prize draw! Read the 2nd Magical Penny Newsletter here for details and subscribe for a chance to win a great personal finance book!
Next week Magical Penny will outline other savings accounts that are perfect for those of us who are out of our overdrafts and already have some emergency savings in an instant access savings account.
Have a great weekend. I certainly will as I’m learning to water-ski!
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