Just a few months ago, things were looking promising for savings. In fact, the Bank of England’s Monetary Policy Report reported in February that British households had saved £125 billion throughout the pandemic. Now that things are reopening and life is returning to a kind of normal, Brits are spending again. And spending more.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, explains: “We may have become a nation of savers while we were stuck at home, but our newfound enthusiasm for squirrelling money away has been tested as life has opened up and our savings have started burning a hole in our pockets.”
How spending replaced savings this past May
Between November 2020 and April 2021, Brits added an average of £16.5 billion per month to their savings accounts. In May, the amount of money in fixed-rate accounts went down by £1.15 billion.
While we don’t know exactly where that money went, it’s fair to assume that Brits are spending more and saving less. “Spending has hit our commitment to building the cash cushions in our current accounts in particular,” says Coles.
A regular savings account is not a good idea
The surprising twist is that lots of people are still using fixed-rate accounts for their emergency funds, even though interest rates remain very low.
“Overall, savings rates remain fairly uninspiring, with the average easy access rate still stuck at 0.06% and the average for fixed rates over 12 months at 0.24%,” according to Coles.
This alone should discourage people from keeping their money in this type of account over better deals such as Cash ISAs. But there’s another issue to consider: it’s very easy to withdraw and spend money in a regular savings account.
Coles explains: “The ease with which money flows in and out of these accounts demonstrates why a current account is a terrible home for an emergency savings safety net. It’s far too easy to spend this money on things that don’t qualify even under the most generous definition of emergencies.”
How to recover from a month of overspending
Had a little too much fun with your savings? The first step to recovering is to assess the damage. Tally up how much you’ve actually spent and on what. Then separate the spending into two lists:
- Things you actually needed
- Truly unnecessary spending
If there are expenses that you can undo – for example, by returning purchases – now is the time. Otherwise, come up with a plan for what to do next. This includes repaying credit card debt, if any, and figuring out how to go back into savings mode.
If you’re short of money, a savings challenge could be a good start to get you back on track. On top of that, you may also need a budget to help you navigate debt payment.
When you’re ready to start saving again, consider looking into better accounts. Cash ISAs offer a great tax-free way of saving but there are other options available, depending on your goals and how long you want to put money away.
