Get the lowdown on savings and insurance

Having savings and insurance can help you to protect against future income shocks and builds your financial resilience.

But if you’re struggling to pay off debts, how is saving possible too?

We’ll talk you through the importance of savings, how you can get into the savings habit as well as looking at different types of savings and ways to borrow. Then we look at whether you should be saving or paying off debts and what protection you can get from having the right insurance.

• The importance of savings and getting into the savings habit
• Different types of savings
• Types of borrowing
• Interest rates
• Should you save or pay off debts?
• Financial resilience – having the right insurance

The importance of savings and insurance

Saving is important because it helps to protect you in the event of a financial emergency – as does having the right insurance. With savings, you’ll be less likely to get into debt when the unexpected happens, have less financial stress and have a sense of financial freedom. Sounds great, doesn’t it?

So, why is it that one in ten Brits have no savings at all? Well it can be pretty hard to save money if you don’t even have enough money to pay for the basics or are struggling with paying multiple debts. That doesn’t mean that it’s impossible though.

Have a look at whether you should save or pay off debts – and visit our sections on maximising your income and reducing your spending.

Little changes to your budget may allow you to put some money away each month, meaning you’re more likely to:

• Have reduced money worries
• Be able to afford a financial emergency
• Afford purchases without getting into debt
• Be able to help family members if they get into difficulty

Getting into the savings habit

Once you’ve paid for all your main bills, start thinking about what money you have left to save. Working out your household budget will show you how much money you have left over after you’ve paid for your essentials.

Top tips for how to save:

• Start small – that way, you’ll be less likely to dip into your savings and you can always increase the amount as you go if you can
• Set your savings to automatic – setting up a standing order that goes out of your account automatically
• Save on payday – saving on or close to pay day means you’re less likely to miss the money or spend it on other things
• Set up a separate account – put your money into a different account other than the one that your everyday spending comes out of
• Watch the interest – try to find a savings account with a good interest rate so you see the rewards of savings

Different types of savings

Starting a savings plan with a financial goal in mind is a really good idea. The Money Advice Service’s savings calculator lets you enter a total savings goal amount and tells you how much you need to save each month to reach it.

The main savings accounts on offer are:

Types of borrowing

We’ve spoken about why it’s important to save. But we know that from time to time, you may need to borrow.

Perhaps you can’t afford an essential purchase, or you’ve been caught off-guard by an emergency — there are many reasons why you might need some extra cash.

If that’s the case, make sure that you’re not rushing into borrowing more than you can afford and understand the options out there.

Before you sign any borrowing agreements, ask yourself:

1. Do you really need to borrow? Borrowing is a big financial commitment. Check the length of your agreement and if there are any early payment penalties. The Money Advice Service compares the cost of borrowing £1,000 across three common types of credit. It’s useful to see how they work and whether you can afford repayments.
2. What do you need the money for? If you’re in debt, then seek professional advice before making any decisions. A debt adviser will be able to help you work out a comfortable budget and explain what borrowing may be available under the terms of your solution.
3. Will you be able to afford the repayments? Borrowing money often comes with added costs, so you could end up paying a significant amount in interest — what you have borrowed plus extra. Secured borrowing is usually fixed against your home or car. This means that if you fail to make payments, you risk your home or car being repossessed.

Below are some common ways you can borrow money, alongside their pros and cons:

Interest rates

When it comes to interest rates, you need to know two things – Annual Equivalent Rate (AER) and Annual Percentage Rate (APR).

Interest is important when thinking about savings and insurance. It is usually compounded, which means it is added to the amount of savings to give a new amount for the next interest period. Interest rates are important when it comes to borrowing too. Instead of earning interest, it’s the amount that you’ll pay on top of your loan for the privilege of borrowing.

The tricky thing about interest rates is that they aren’t fixed. They can change. Even a small change in an interest rate can have a big impact. So, it’s important to keep an eye on whether they rise, fall or stay the same.

Knowing the AER and APR will allow you to properly compare products on offer.

Here’s what AER and APR mean:

• Annual Equivalent Rate is the total interest you’ll receive on your savings in one year. The higher the percentage, the more interest you’ll receive.
• Annual Percentage Rate is the total amount of interest you’ll pay on your borrowing in one year. The higher the percentage, the more you’ll pay for you borrowing.

Should you save or pay off debt?

It can be tricky to know whether to save money or pay off debt.

There are a few good reasons to save first and pay down debt later, like:

• You don’t have any emergency savings
• If you have debt with a very low interest rate – like a credit card or other debt with a very low interest rate

When to pay off debt before saving:

• If you have multiple high-interest debts
• You have a debt emergency (bailiffs, court action, are about to lose your home)

Have a look at our understanding credit and debt section for more information on types of debt, and the consequences for not paying. If you’re struggling with multiple debts or are unable to keep up with repayments, then contact one of our advisers to find out your options.

Financial resilience – having the right insurance

When we’re short on cash, we look at unexpected spending to see where we can make savings. That’s the right thing to do, in fact, we encourage it. Yet, allowing contents insurance to lapse may not be in your best interest.

Before you buy any type of insurance, you’ll need to check:

• What the policy covers – never assume anything
• What the policy doesn’t cover
• The amount you’ll have to pay on excess or premiums
• Any limits on your claim – like the amount you can claim for a single item
• Whether you’re covered in another type of insurance. For example, your mobile may be covered by contents insurance – so you wouldn’t need gadget insurance as well

Different types of insurance

Mobile phone and gadget insurance

Ever had broken, lost or had your phone stolen? You’ll understand how much hassle it can take to replace it. If this happens to you a fair bit, or you have particularly expensive gadgets to protect, then it may make sense for you to look into mobile phone insurance.

Contents insurance

Contents insurance covers your possessions against fire, theft and, in some cases, accidental damage. It covers your own possessions and those of close family members who live with you. You don’t have to take out content insurance, but it is a good idea. If not and any of your contents are lost, stolen or damaged – you will have to pay to replace them.

Buildings insurance

If you’re a homeowner, with a mortgage, your lender will usually insist that you have buildings cover for the term of your mortgage. While there is no legal requirement to have buildings insurance, repairs to your home can be very expensive. If you’re a landlord, you will be responsible for any repairs to your building. Building insurance can cover these costs.

Travel insurance

Depending on how often you travel, there are loads of different types of travel insurance from single trip to annual cover or European to worldwide cover. Travel insurance is there to help you cover you andyour belongings while you’re on holiday.

Vehicle insurance

You need to have at least third-party motor insurance if you drive or own a vehicle. This includes having insurance if you leave the vehicle parked on the street, on your driveway or in a garage.

Income protection

Income protection insurance covers a range of products that allow you to meet your financial commitments if you’re forced to take an extended break from work. This can include if you can’t work because you’ve had an accident, fallen sick or you’ve lost your job through no fault of your own. Income protection insurance then pays an agreed portion of your salary each month. There are three main types of income protection that you can choose from. They are – accident, sickness and unemployment; payment protection insurance; or mortgage payment protection insurance.

Critical illness insurance

This pays out a tax-free lump sum if you’re diagnosed with an insured medical condition during your policy. It’s different to life insurance, which pays money to someone if you pass away. Critical illness insurance money can be spent however you want. It can be used to clear debts, pay medical bills or adapt your home to your needs.