By age 40, many people have already achieved key milestones in their life. Perhaps you are firmly on the housing ladder, married and with young children. However, many goals still lie ahead of you – such as retirement – and you need savings to help you move towards them. Yet how much should you have saved by age 40? Below, our Oxfordshire-based financial planning team at WMM outlines the UK savings landscape in 2022, some ideas for a healthy savings target and how to integrate this into a wider financial plan.
What is the average UK savings amount at age 40?
Let’s first distinguish between common savings and pension savings. The former includes cash held in an ISA or regular account and is often used for purchases like a house extension, a new car or a family holiday. It is also used as a “rainy day fund” (for emergencies). Pension savings, however, are locked away until age 55 (rising to 57 in 2028) and are commonly used to fund a retirement lifestyle.
Around 1 in 8 UK adults (6.5m people) have no cash savings to their name whilst a third have less than £2,000 to their name, leaving many vulnerable to shocks such as sudden job losses. Those aged 35-44, however, typically have £16,000 in cash savings.
How much should I have saved by age 40?
As a general rule, it is wise to have 3-6 months’ worth of living costs ready in easy-access savings account for emergencies. This helps prevent you from turning to debt if, say, you need to suddenly take unpaid leave to help care for a terminally ill relative. Here in Oxfordshire, the average monthly living costs for a family of 4 (excluding rent) are £2,473. Therefore, saving £15,000 in emergency savings might cover 3-6 months’ worth of living costs in an emergency.
Building cash savings at 40 – some considerations
Of course, £15,000 is a lot of money and would take time for many people to build up. It also imposes a potential “opportunity cost” on your finances (i.e. money saved towards your cash buffer could be put to better use elsewhere, such as overpaying the mortgage). Bear in mind that your target may be higher or lower depending on your needs and circumstances.
Consider speaking to a financial adviser about how to best build your emergency fund so that your other savings/investments are not neglected (e.g. pension contributions). Be careful, also, not to save too much in cash. Historically, cash has been a poor asset for keeping up with inflation. In 2022, interest rates on savings accounts have gone up, but are still far below the currently 9.4% rate of inflation. This means that cash will almost certainly lose value over time and so households should consider investing in other asset classes (which have the potential for higher returns) once their cash buffer is ready.
Another thing to be mindful of is your use of ISAs. In 2022-23, you can put up to £20,000 into your ISAs and receive interest, capital gains and dividends tax-free. However, committing cash to your ISAs is almost certainly going to be a waste of your ISA allowance. Remember, you can generate up to £1,000 in interest outside an ISA each tax year (£500 for those on the Higher or Additional Rate). Assuming you limit your cash savings to your target 3-6 month emergency fund, therefore, most people are unlikely to need to use an ISA to save on tax on interest. This then allows you to use more of your £20,000 ISA allowance towards other investments such as equities or bonds.
Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469
This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).