In the previous post, we looked at everything you need to know about how to accelerate your progress. This time, we'll look at what you need to do.
Everything You Need to DO
Make use of Regular Increments
The easiest thing you can do to accelerate your progress is to commit to regularly increasing your savings rate. It really can be astonishing what a difference this can make. Let’s put some numbers on it to illustrate the point.
Let’s say you’re saving £250 per month. It doesn’t matter for now about whether you’re saving into pension, ISA or something else. Assuming your savings grow by 7% per year, after 30 years, you’ll have just over £300,000 – not too shabby.
Now, let’s say you increase that by £25 per month each year, so in year two you’re saving £275 per month; in year three you’re saving £300 per month and so on. By doing this, you’ll shave off about six and a half years to get to £300,000. £25 a month, that’s doable.
It’ll hurt most in the early years, but as your income rises, a static annual increase will barely register. Increase by £50 p/m each year and you’ll hit £300 grand in just over 19 years, knocking a third off your time horizon.
What about if you increase by a percentage? If you increase your monthly savings by 10% each year, it has about the same effect as the £50 p/m increase, give or take a few months.
Or maybe, rather than increasing by £50 p/m once per year, you increase by £20 p/m every three months. Once a quarter you ramp up your savings – more regular but smaller increments each time. In this case it’ll take you just over 21 years to hit £300k.
Obviously, it depends on the increment size, the percentage growth rate and the frequency of the increases, but the maths is fairly simple. Hopefully we can agree though that regular increments won’t hurt too much as they happen, but can make a big difference over time.
How can you do this? Think about including it in your regular review process. Ask yourself, once a year at least, what you can do to accelerate your progress. Then, if you decide that you’re going to increase your savings by £50 p/m, the first place you should look is your pension.
If you’re employed you should be able to ask your employer to take an extra £50 p/m off your pay. You’ll pay less tax so you shouldn’t see a reduction of £50 in your take-home pay; it should be a bit less than that.
If you’re paying into your own pension, then it’s even easier. Don’t be tempted to increase by £50 p/m including the tax relief, but treat the tax relief as gravy on top of the £50 you’re putting in, and automate where you can. This isn’t always easy, as the providers often can’t comply with this, so you may have to make a point of increasing the direct debit each year or each quarter.
What if you get a bonus or other ad hoc lump sum payment? Commit to saving a chunk of it at least equal to the percentage of your normal basic pay that you’re saving. If you’re paid £2,000 p/m and are saving £200, that’s 10%, so make sure you save at least 10% of any windfalls. Ideally, if that money is extra to everyday requirements, try to save a much bigger proportion than that – go for 50%.
It can be so easy to back off, and there may be seasons of your life where that is necessary such as a reduction in income during maternity leave. But the pursuit of your financial goals is pretty relentless, so try not to be tempted to relax. Remember that any increment is at its most painful the first time you make the higher contribution. The month after that, you’re already used to it, and that’s particularly true of smaller, regular increments.
OK, ready to crack on?
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