How to Start Saving

Set your financial goals, consider your time horizon and calculate your starting savings rate

Holly Cook 18 September, 2012 | 8:00AM Alanna Petroff
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Before you embark on your saving and investing career, there are a few key decisions you will have to make:

What Are You Saving For?

People save and invest money for a variety of reasons, including saving for a car, saving for tuition fees or saving for a child's future. It is helpful to make a list of your financial goals and then calculate how much they will cost.

Let’s assume that you’re saving for retirement. What does retirement look like? Does it look like a continuation of the status quo? Or does it look like an opportunity to visit far off places and spend six months of the year on a cruise ship? If it’s the latter, then the income your retirement is going to require will likely be substantially more than the income you might need if you plan to work part-time well into your 70s and become self-sufficiently green-fingered. Try calculating what it will cost you each year to live this imagined in-retirement life.

Similarly, for other saving and investment goals, try to calculate how much money you will need to attain your goal and/or make your big purchase. This gives you a starting point to understand how much you will need to save and invest.

Time Horizon

Related to what your financial goals are, understanding time horizons is crucial. Saving and investing for a short-term goal will be very different compared to saving and investing for the long term.

For example:

- Saving to buy a new car in a few years’ time? You should probably be looking to store cash in a bank account or cash ISA, even if inflation erodes the interest you earn.

- Want to save enough to put a deposit on a house in ten years’ time? Medium-term horizons such as this could warrant putting money into a target-date fund, within an ISA wrapper, whereby assets are allocated depending on the ‘end date’ of the investment.

- Saving to ensure a comfortable retirement that will start in 30 years’ time? A pension that locks away savers’ money until their senior years more likely fits the bill here, with an aggressive portfolio to start with and a gradual shift into more conservative assets as retirement draws nearer. 

How Much Can You Afford to Save?

The first priority, ahead of saving and investing, is paying off debt. Specifically, pay off your credit card and overdraft debt, because these kinds of debts can grow quickly from high interest rate charges. There’s no point in investing in the markets if it means your debt load is growing and growing. Make debt payments your first priority, then move onto saving and investing. (Struggling with debt? Here are some tips for getting on the straight and narrow.)

Once you've paid off your debt, this article talks you through a real life example of how to calculate what you can set aside. Conventional wisdom claims you should aim to sock away 15% of your gross salary per year in order to obtain an income in retirement that allows you to maintain your living standards. Starting with 10% is perfectly reasonable.

Are You Conservative or Aggressive?

To assess the likelihood of achieving your goals at your current savings rate, plug your numbers into Morningstar’s Asset Allocator tool (available to Premium members; try it for free when you take a Premium trial). Not only will this give you an approximate idea of whether your goals are realistic given your finances, or whether you need to adjust either, it will also help you consider whether you need to adopt an aggressive, moderate or conservative investment style to improve your chances of financial success.

Note that your investment style will very much rely on your attitude to risk. If you’d rather restrict your potential returns in order to avoid losing any money, you’re better suited to a conservative style. If you can stomach losing some cash if it means you’ve got a chance to earn higher rates of return, you can probably handle a more aggressive style of investing.

We talk about risk in more detail in this article: A Guide to Assessing Your Risk Tolerance


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites