Money Lesson 3:
Start Saving
You’ve set up a budget, got your debt under control, now lets discuss saving.
Saving is a fundamental habit essential for financial well-being. In our earlier discussion on budget construction, we briefly touched on the topic of saving by covering the concept of 'saving pots'. Now, we're going to take this a step further and explore savings in greater detail, discussing the types of 'saving pots' you should consider and the optimal bank accounts for storing these savings.
What is saving?
Saving is all about putting money aside, bit by bit in small chunks, over a period of time. Overtime these small chunks of money will accumulate into a larger pot of money which are available for you to use.
Lots of people ask why they should bother saving - why not just spend all of the money now instead? The reason saving is so important, is because it helps you to cover large or unexpected costs in future without needing to rely on debt. Or in other words, it creates cushion for life’s big and small financial challenges.
For example, to pay for a holiday or if your car breaks down. These are large expenditures that most people would struggle to cover from their monthly income as you don’t have enough monthly disposable income. By saving up money overtime, you’ll have a pot of money which you can use to cover these costs when needed, without having to rely on forms of debt like overdrafts of credit cards which can lead to debt problems. For these reasons, saving is an important way to protect your financial security and everyone should aim to build up savings to cover emergencies and short term goals.
Should I pay off debt or save?
Saving is a powerful habit that everyone should build—but before jumping in, it’s important to assess your overall financial situation. If you’re carrying significant debt, especially high-interest “bad debt,” it often makes more sense to focus on reducing that first. (We covered this in the previous Money Lesson: Managing Debt.)
That said, it’s absolutely possible—and sometimes smart—to save while still carrying some debt. This works well if:
Most of your debt is “good debt” (like a mortgage or student loan), and you’re keeping up with the repayments reliably.
Any “bad debt” (like credit card balances) are well controlled and being paid off in full each month.
But if your debts are growing or feel unmanageable, it’s usually best to prioritise paying them down first. Tackling high-interest debt early frees up more of your income in the long run—giving you more breathing room to save, invest, and build lasting financial security.
How to Start Saving
Establish What Savings Pots You Need
We’ve already introduced the idea of savings pots—separate pots of money that you build up over time to prepare for future expenses. So the first step when starting to save is to work out what saving pots you need to set up?
The first and most important pot to set up is your Emergency Fund. This gives you a financial cushion for unexpected costs, like a broken boiler or sudden loss of income. Once that’s in place, the next step is to think about your short- to medium-term goals. These might include large, one-off expenses like a holiday, wedding, or house deposit. Creating savings pots for each of these helps you stay organised, avoid debt, and feel more in control. You’ll find more detail and examples in the cards below.
Emergency Fund
If there is one type of saving pot that everyone should have, it’s an ‘Emergency fund’ or sometimes people call it a ‘Rainy Day Fund’. Saving to build an ‘Emergency Fund’ is the most important type of saving that anyone can do. If you haven’t got an Emergency Fund already, we can’t urge you enough to go and set one up.
Your Emergency Fund means you have some financial security if something goes wrong. It’s a pot of money that you set aside to cover unexpected costs such as a boiler breakdown, accident that prevents you from working, or damage to your car. People often get into financial difficulties when these things happen, as they can’t afford to pay for them when they happen and have to borrow money to cover the costs. However, if you have money aside for these unexpected events in an ‘Emergency Fund’, it will give you peace of mind and the financial resilience needed to cover these costs when they happen. without having to rely on credit cards or expensive types of debt.
The general rule is to have at least three months' worth of living expenses saved up in an instant access savings account. This should include rent, food, school fees and any other essential outgoings. Building your ‘Emergency Fund’ should be your first priority when you first start saving and we’d encourage you to put as much as possible into this pot to build it up as quickly as you can. It will probably take a while to build up initially, but once you’ve got it, it’s there whenever you need it if something goes wrong. You’ll only need to top it up, if your monthly expenses increase and you think you need to put more aside, or if you use any of the funds to cover unexpected costs.
Other useful Saving pots to set up
Once you’ve established an emergency fund, you can begin allocating funds for other financial goals. It’s prudent to create separate savings pots for various significant expenses that you can’t cover with your regular monthly paycheque all at once, particularly those anticipated within the short to medium term, typically within the next 5 years. Ask yourself what large expenditures are you likely to have in the next 5 years, then think about whether it would be appropriate to set up a saving pot for these. Examples of such expenses include:
- A holiday
- Christmas Presents
- Annual Car Insurance / Car Servicing
- House Deposit
- Wedding
If you’ve built up an emergency fund, plus enough in different pots to cover large expenditures within the next 5 years, then you might want to consider investing, which we will discuss in more detail in the next money lesson.
| Savings Pot | £ / Month |
|---|---|
| Car | |
| Holiday | |
| Wedding | |
| Emergency Fund | |
| Total Saving Pots | -£250 |
Set up an Automatic Transfer
Now that you’ve decided which savings pots to set up, it’s time to start putting money into them. Each month, aim to transfer your chosen amounts into each pot —consistency is key.
One of the easiest and most effective ways to stick to your savings plan is to automate your transfers. Set up a standing order or scheduled payment to move money from your main account into your savings pots as soon as you get paid. This way, the money is safely set aside before you even think about spending it—removing the temptation altogether.
Think of it as paying your future self first. Whether it’s £50 into your Emergency Fund, £30 for a future holiday, or £20 towards Christmas gifts, automation takes the effort out of saving. Over time, these small, regular contributions can quietly grow into something significant—and you’ll thank yourself later for getting started.
Check you're using the right savings account
It’s also important to make sure you’re using the right type of savings account for your needs. You want to obtain the best interest rate possible without compromising your ability to access the funds. Interest rates and account options can change frequently, so it’s a good idea to review this every few months to see if a better option has become available or if your circumstances have changed. Plus you want to make sure you’re taking advantage of any tax savings that are available.
Accessibility
This means how easily you can access your funds. Some accounts will be ‘instant access’ which means you can add or withdraw money whenever you like. Others will be for fixed terms, which means you lock your money away for a period of time and either can’t access it or might be penalised if you make a withdrawal early.
For saving pots like an ‘emergency fund’ you’ll want an instant access account. For something you are saving up for in two years, you might be willing to lock the money away for a period of time to earn more interest. If you’re unsure it’s always best to make the money more accessible to make sure you can always access it when needed.
Interest Rate
When you put money into a savings account the bank will usually pay you to keep your money in the account. The money you earn is called interest. The interest rate will determine how much interest income the bank pays you.
For example, if you place £1,000 in a savings account earning 2% interest annually you will earn £20 in interest, giving you £1,020 after one year. When picking an account you obviously want to pick one with a high interest rate to maximise your returns. However, usually the longer you lock your money away for the higher the potential interest rate, so there is a balance between keeping the money accessible and maximising the amount of interest you can earn.
Tax
Depending on the local tax rules in your country you may have to pay tax on interest income over a certain limit so it’s worth considering this. In the UK, basic rate taxpayers can earn £1,000 tax free and higher rate taxpayers can earn £500.
If you are going to earn more than this in interest income you might want to consider special accounts which give you tax benefits. For example, an ISA is a tax wrapper which means all the interest you earn is tax free. But there are special rules that must be followed for these accounts.
Below is a list of the different types of accounts that you might come across to be aware of before selecting which type of savings account is appropriate for you:
Types of Savings Accounts
Current Accounts
For day-to-day banking. Often offer other perks e.g. overdraft, cashback or insurance. But they are not the best place for saving. They allow you to receive regular payments and set up payments for bills.
Instant and Easy Access Accounts
The place for your emergency savings. They may pay more interest than a current account and allow fast withdrawals.
Regular Savings Accounts
Ideal for saving a fixed amount monthly. You often get a better interest rate, but there are limits on how much you can deposit or withdraw.
Fixed-term Deposit Accounts
Also called ‘bonds’, these are for locking in savings for a set term at a fixed interest rate. Great for medium-term savings where you don’t need access right away.
Notice Accounts
These require advance notice to withdraw funds. Typically offer higher interest in return for less flexibility.
Index-linked Accounts
Like fixed deposits, but the interest rate adjusts with inflation. Returns may vary, but they help protect against inflation risk.
Cash ISAs (Tax-free)
Tax-free savings. You can save up to an annual allowance. Available to anyone over 16. A Junior ISA is available for under 18s.
Help to Buy ISA
Government-backed ISA for first-time homebuyers, offering a bonus on savings toward a deposit.
Junior ISA / Child Trust Funds
Long-term savings for children. Tax-free and locked away until adulthood, typically used for education or first purchases.
In general, current accounts serve everyday banking needs, while easy access or regular savings accounts are ideal for most people's saving goals due to their accessibility. For savings earmarked for the future but not immediately needed within the next few months, fixed deposit or notice accounts are usually appropriate as they offer higher interest rates. ISAs are beneficial for individuals subject to tax on interest earned, but if you're considering investments (as discussed in the upcoming money lesson), it may be more advantageous to utilise your ISA allowance for tax-efficient investing in stocks and shares rather than solely for interest on savings.
Want to Make the Most of Your Savings?
We’ve rounded up the best savings accounts available right now — with competitive interest rates and low fees.
View the Best Savings RatesDo you need different accounts for each saving pot?
A common question is: How many savings accounts should I have? Should you open a separate account for each savings pot? The answer depends on your personal preference and how you like to stay organised.
As mentioned earlier, the best way to manage your savings pots is by setting up automatic transfers each month, ideally timed with payday. When doing this, you have two main options:
Option 1: One Account for All Pots
With this approach, you transfer the total monthly amount for all your savings pots into one main savings account. You then keep track of how much is allocated to each pot (e.g. holiday, emergency fund, car insurance) using a spreadsheet.
This method keeps things simple and centralised. It also allows you to maximise interest by keeping all your savings in the highest-rate account available. The trade-off is that it requires some manual tracking and discipline.
We’ve included an example of how to use a spreadsheet to track multiple pots within a single account in the diagram below.
| 🐧 Saving Pots | |||||||
|---|---|---|---|---|---|---|---|
| Month | Car Pot £50/mo |
Holiday Pot £50/mo |
Wedding Pot £50/mo |
Emergency Fund £100/mo |
Car Spend | Interest | Total Balance |
| Jan | 50 | 50 | 50 | 100 | 2 | 302.00 | |
| Feb | 52 | 100 | 100 | 200 | -48 | 4 | 556.10 |
| Mar | 102 | 150 | 150 | 300 | 6 | 858.30 | |
| Apr | 152 | 200 | 200 | 400 | 9 | 1,160.60 | |
| May | 202 | 250 | 250 | 500 | 11 | 1,463.00 | |
| Jun | 252 | 300 | 300 | 600 | 14 | 1,765.50 | |
| Jul | 302 | 350 | 350 | 600 | 16 | 1,968.10 | |
| Aug | 352 | 400 | 400 | 700 | 19 | 2,270.80 | |
| Sep | 402 | 450 | 450 | 800 | 22 | 2,573.60 | |
Notice that our template includes a column for 'expenditure' against each pot, acknowledging that saving doesn't always mean hoarding. Sometimes, you'll need to dip into your savings for their intended purpose, like covering car insurance or servicing costs. By tracking expenditures, you can monitor your pot's balance and plan accordingly for future expenses.
Option 2: Multiple Accounts
Alternatively, you can open separate bank accounts for each savings pot. This makes tracking effortless—you can clearly see how much is in each pot at a glance. However, it may involve juggling multiple accounts and you might not always get the best interest rate on each one.
Ultimately, there's no right or wrong approach—just the one that fits your lifestyle and makes it easier for you to stay consistent with saving.
Are savings safe?
Savings are typically considered low risk, offering stability for your money. In the UK, safeguards are in place to protect your savings and uphold their security. The Financial Services Compensation Scheme (FSCS) is a vital component of this safety net, providing protection for savings up to £85,000 per person, per authorised financial institution. This means that in the event of your bank or building society encountering difficulties, you can claim compensation for up to £85,000 of your savings.
It's crucial, however, to verify that your financial institution is covered by the FSCS. Additionally, if you have savings exceeding £85,000, spreading them across different banks can ensure maximum protection, as the £85,000 protection applies per financial institution rather than being a total sum across all banks.
Saving is the cornerstone of financial security. It provides a safety net for life's unexpected expenses and allows you to achieve short- and long-term financial goals without relying on debt. Whether you're building an emergency fund, saving for a holiday, or planning for a major purchase, establishing a consistent saving habit is key to taking control of your finances. Start small if you need to, automate your savings, and organize your funds into clearly defined pots to stay on track. By prioritizing saving today, you're laying the groundwork for a stable and stress-free financial future.
Great work — you now understand how to build up savings and why it’s such an important step on your financial journey. Whether it’s for an emergency fund, a big purchase, or future plans, saving gives you stability, freedom, and confidence.
Now that you’ve got a savings habit in place, it’s time to take the next step: learning how to make your money grow over the long term. In our next lesson, we’ll introduce you to the basics of investing — and show you how to get started, even with small amounts.