How to start saving with purpose

One of the key aspects of money management is encouraging people to start saving rather than spending everything today.

While saving is indeed a fundamental pillar of effective money management—and if you're saving, that’s great news—it's worth asking: is that the whole picture? Are we missing something?

Many people have told me they’re diligently putting money aside—into ISAs, mutual funds, pension pots, and more.
I always say that’s great—but do you know why you’re setting that money aside?
Here’s the bitter truth: there’s no point in saving or investing money just for the sake of it.

Yes, you may earn some interest—but when you realise there are withdrawal restrictions on these products, you might delay using that money for a trip, a gadget, or even an emergency. In other words, you’re locking your money away and losing the flexibility to use it when you need it.

On the other hand, it’s easy to swing to the opposite extreme—spending everything in one go. That £500 trip could turn into an expensive £2,000 indulgence, simply because you think, “I have money saved up!”
So, does that mean you shouldn't invest or save at all?
Let’s break it down.

After working out your monthly budget and setting aside 25–30% of your income for savings, the next step is to list your personal life goals in chronological order. Use the SMART method to clarify your goals:

• Specific (What exactly is the goal?),
• Measurable (How much will it cost?),
• Achievable (How much do I need to save for it monthly?),
• Reasonable (Prioritise your goals),
• Time-bound (When do you want to achieve that goal?).

Once you’ve prioritised your goals and calculated how much you need to save for each on a monthly basis, determine how many of those goals fit within your 25–30% savings allocation.

Top tip: Don’t let saving compromise your current quality of life.
Now that you know what you're saving for, there's one more critical step: open separate pots for each goal. These could be ISAs or savings accounts.

Top tip: Savings accounts do not attract tax unless your interest exceeds £1,000 (basic-rate taxpayer) or £500 (higher-rate taxpayer). This means you’d need to save over approximately £500,000 before you start paying tax on the interest. Always check the latest rules at gov.uk, but most people will fall within these thresholds and won’t owe tax on savings interest.

Why separate pots?
Each goal may require a different product, depending on when you’ll need the money and how often you'll withdraw from that pot.
For example, an emergency fund requires a product that allows flexible, penalty-free withdrawals. On the other hand, long-term goals like buying a house are better suited to products with higher interest rates that limit early access.

Saving is only meaningful when you understand the why.

Remember: Every pound has a purpose. Define it, and you’ll be wiser with your money.
 
Written by
Mrudula Muralidharan
Finance Coach and Founder
Million goals