We heard lot of falsehoods and tell ourselves a lot of untrue things about saving up money and why we can’t do it just now.
Time to address a few common myths and set it right.
MYTH 1: I shouldn’t save too much, I got to live now.
Don’t save up for the joy of saving. Save to reach your goals. Save to be safe or comfortable tomorrow.
Save up so when you retire you don’t have to live off tinned food or have to move in with your children.
MYTH 2: I cannot save a lot of money, so it’s not worth it.
Even if you can only save £20 per month, it’s still worth doing. It all accumulates and gives you a bit extra should you need it.
And once you have more money to save, you are already in the habit of doing so.
I have heard people on really good incomes say that they can’t save up. Just because your income just about covers all your spendings doesn’t meant you can’t save. Look at your expenses, it may be that there is an easy way to cut some back and save the freed up money.
Or do you have expensive habits like going to the pub every night or smoking? Imagine you would half the expenses there, how much you could suddenly save. When my cousin stopped smoking, he saved every last Penny he did not spent on cigarettes in a savings account. From that money, the family is now spending a lovely holiday every year.
Saving is a habit. And a muscle that can be trained.
MYTH 3: I have enough money, I don’t need to save
We have all just seen (Covid-19) how fast everything we have taken for granted can change. Fortunes can be lost, jobs made redundant, you can have an accident or get ill.
MYTH 4: I can’t save because I have kids and I need to buy them things
I have a 14 months old son. His current favourite toy is a dustpan and a £2.5 set of colourful stacking cups he loved since he was 8 months. Other things he loves are a whisk, a pot and pegs. And boxes, he loves boxes!
I don’t want to say that you shouldn’t buy you kids toys, but he/she does not need hundreds of them. They can also be bought secondhand. Many things sold on Gumtree, Shpock, Facebook marketplace or eBay are as good as new and cost a fraction of the price.
That you have kids is all the more reason to save. So there is funds for higher education or a security net in case you have extra expenses.
MYTH 5: I can’t save, I have no idea how to invest
You don’t need to know how to invest to start.
Investing is not saving. You can invest some of your saved money, but you don’t have to.
Investing means that you buy something which you believe will increase in value over time.
This could look like this: You invest £1,000 in something which has an interest rate of 10%. You leave it there 10 years. After 10 years. You now have £2,600. Why? In the first year, your 1,000 grew 10%, it becomes £1,100. In year 2, you will get the 10% interest on £1,100 (not just 1,000 anymore). Ans so it continues, every year it grows. This is compound interest.
Here a few examples how to invest: You can buy a share, which is a teeny tiny part of a company, and if the company grows, because more customers buy their product, so will your share (=the teeny tiny part you own of this company). You can also buy investment funds, which are a mix of shares. You can buy gold, and when the price of gold increases, as it does at the moment, when you sell it you make a profit.
Important to know is that investing comes with risks. Value can go down as well to you could lose the initial sum you invested. The higher the return (the interest rate), the higher the risk.
So start saving, start putting money aside. Once you have a little pile of money, you can invest a part of it at a risk you feel comfortable with.
If you have £10,000 you could leave £8,000 in a relatively safe savings account, and invest £2,000 in different ways. £1,000 in an investment funds, £1,000 in shares.
MYTH 6: I don’t have to save until I am older.
Big mistake! The earlier you start, the better. Over time, compound interest helps you to grow your savings even more.
Random example to illustrate:
If you start saving when you are 20.
£100 every month, until you are 67. With an assumed interest rate of as little as 1%, you end up having £72,000 at 67.
If you only start saving at 47, to get to the same amount (£72,000), you have to save £270 monthly, almost triple.
MYTH 7: I didn’t start when I was younger, now it’s too late.
Adapted from the Chinese proverb:
The best time to start saving was 10 years ago.
The second best time is now.
It’s never too late to start saving. Understand how much you need to save up and make a plan.
MYTH 8: I bought a home, I don’t need to save.
If you bought a home on a mortgage, you don’t own it until he last penny is paid. At the moment you sit on a pile of debt.
While it is true that you might outright own your home when you retire and that will help to keep living costs down, having a house will mean that you have ongoing maintenance and repairs coming up.
You still may want to have emergency funds, go travelling, buy a new car.
MYTH 9: I have debts, I cannot save.
While it is true that you should always prioritise paying off debts, it doesn’t mean you cannot divert a tiny part into saving.
In myth 5 I explained compound interest. Sadly, this works against you when you have debts. The bank charges you interest for the money you owe. So even by not getting into more debt by buying more, just by owing you will be charged interest and your debt will increase.
However if at all possible try to save up small amounts. This will also help you to not make more debts, if there is a shortfall of money.
The only time I don’t save is when I don’t have an income, in this case, I worry about not making it worse and not going into debt.
Most of the above myths are a mindset issue, and can be solved by determination.