Do you want to save more and work less?
PUBLISHED: 11:31 30 November 2018 | UPDATED: 11:31 30 November 2018
Living for today doesn't pay the bills, says Peter Sharkey - but you can make your money work for you.
News this week that over the past 12 months individuals have saved, on average, just £8 a month, or £96 a year, served to confirm that as a nation, we’ve experienced the worst national savings rate this century. Not since 1999 have we saved less per head; even during the depths of the financial crisis, we were squirrelling away £166 a year.
Even that isn’t much though, is it?
According to the Money Advice Service, four in 10 UK adults have less than £500 in savings to cover an unexpected bill, while almost three-quarters of working-age people have not set aside a savings ‘buffer’ of three months’ income.
Furthermore, the corrosive effects of inflation only make matters worse. Inflation has averaged around 2.4pc this year, a rate you’re unlikely to match assuming you’ve deposited your £96 in a bank account, where you’re lucky to receive 1pc in interest. This means you’re losing money as the value of your cash savings has declined by the difference between the two, ie around 1.4pc.
Considering the longer-term consequences of a perilously low savings rate, it’s amazing that people don’t put more away each month.
The most obvious of these consequences concerns the state pension, about which more in a second, but perhaps most working-age adults don’t bother to set money aside because they possess what a recent American survey called a “present-fatalistic time perspective”. I didn’t have a clue what that meant at first, but to translate: a worryingly large number of adults have what we know better as a ‘live for today’ attitude.
People who adopt such an approach are, according to the survey, “less likely to save money because they live in the present, feel that lessons of the past are irrelevant and feel powerless to change their future.” As a consequence, they “feel that money and saving for the future does not matter.”
That’s all fine and dandy, but are these people expecting the rest of us to bail them out when they run out of money, or don’t have any pension? Couldn’t happen? It could – let me explain.
First, take a look at the Pension Clock on the moneymapp.com website. You will note that as of today’s date (November 30, 2018), there are 14 years, four months and four days before the UK’s pension pot, aka the UK National Insurance Fund (NIF), runs dry. To quote the website: “This is no wacky, attention-grabbing prediction. The forecast was made by the government’s own advisers early in 2018.”
The NIF was created in 1948; unfortunately, since day one, it has operated on a pay-as-you-go basis. This means it pays pensions out of money it receives from those currently in work.
Seventy years ago, this didn’t seem to matter much. The average male lived until he was 66, while women could expect to be around until they reached 71. Considering that men retired at the age of 65 and women’s pensions were much lower than those paid to males, few people doing the calculating considered a pay-as-you-go pension system a problem.
That was until the baby boomers started arriving and dramatic medical advances pushed life expectancy beyond anything the people living and working in the immediate post-war era could imagine. Today, female life expectancy is 83 years; for men, it’s 79.
The effect, of course, is to blow the original calculations to smithereens because we have an increasing number of people living much longer than anyone could have imagined back in 1948. Meanwhile, the number of workers making National Insurance Contributions is falling as the number of people receiving pensions is increasing. Even those endowed with a “present-fatalistic time perspective” can see that the arithmetic just doesn’t stack up. Numerous studies have shown that one common characteristic displayed by people who don’t save is the complete absence of a reason to set money aside. Without an all-important savings goal, they have no reason to choose saving ahead of spending.
Yet a savings goal motivates people to save for a specific purpose. It could be buying a car, a bike, clothes, anything. It could even be saving for a pension, because most adults of working age can probably forget collecting one from the state when they retire. And that includes those who live for today.
For more financial advice, check out Peter Sharkey’s regular column, The Week in Numbers.