Working Out a Budget (3): How Much Should I Save?

Written by Karen Bryan

how much should I saveTrying to answer the question “How much should I save?” is no easy task. In my opinion, you need to work out what’s left of your income after you deduct essential spending. Then you have to decide what to do with that remaining money.

Emergency Fund

I’d start by saying that having a back up of 3 months income is essential, in case of any unforeseen circumstances.


I believe that paying in to a pension scheme to give you some income to top-up the State Pension is also important. Some employers run a defined benefit scheme, where you know what pension you’ll receive, based on formula of your earnings and number of years worked. If my employer offered this type of pension, I’d join immediately and enquire if I could also pay in additional voluntary contributions (AVCs) to build up a larger pension.

Unfortunately many employers have either downgraded their defined benefit pensions, e.g. moving from a final salary to a career average when calculating your pension. Others have even abandoned defined benefit schemes in favour of money purchase pensions, where your pension is  based on the value of the funds invested in the stock market when you retire. This means that you don’t know the size of your pension until you cash in your pension pot.

The National Employment Savings Trust (NEST) workplace pension scheme will be phased in between 2012 and 2017. By 2017 employers will have to pay 3% of your salary into the scheme, you’ll pay in 4% and tax relief will contribute another 1%.  If I were an employee, I’d stay in this scheme, to get the effective doubling of my contributions into my pension pot. The downside is it’s a money purchase scheme, so, as explained above, the size of you pension isn’t guaranteed.

Other Savings

Once I had set aside my emergency fund and decided how much to pay into my pension, I’d then look at other reasons for saving money. Personally I like to have a bigger financial cushion than three months income.  While it may be tempting to spend any money left after you’ve covered what you perceive as the basics, I am, by nature a saver. Perhaps it’s the canny Scot in me, coupled with the fact that I’ve been a freelancer for many years. It’s not that I’m  obsessive about saving, I want to enjoy my life too. As ever, it’s about balance, spending enough to have a good time today and trying to prepare for tomorrow too.


With university fees in England set up to rise to £9000 a year in many institutions, you may wish to start saving towards your kid’s education. Our twin sons both went to university but we were fortunate that we lived in Scotland at the time, so as our sons studied in Scotland, they didn’t have to pay any fees. But we still realised that the student loans they’d be eligible for wouldn’t cover their living expenses away from home.

Saving a Deposit to Buy a House

One of our sons recently looked into getting on the housing ladder. If you want to get a good mortgage deal, you often need to have a deposit of 25%.  This probably means around £25,000+ for a flat in many UK cities. However, at the moment, buying property doesn’t seem a wise move for our son, as he may be moved around different locations by his employer. There’s also the risk that house prices may fall further in some parts of the UK. However, we’ve advised him to save up a deposit in case at some point in future buying a properly makes more sense for him.

Paying Off Debts

If your are paying a higher rate of interest on any loans than you receive in interest on your savings, it may be wise to pay off these debts first. For example, if you receive 3% tax free interest on a Cash ISA but are paying 16% on a credit card balance, it makes sense to clear the credit card balance.

What Are Your Savings Priorities?

I hope that my personal experience of the “How Much Should I Save” question has helped you clarify your thoughts and come to a decision on your savings priorities.

My Other Articles on Budgeting

Working Out a Budget (1): Current Spending

Working Out a Budget (2): Essential Spending