The post that outlines how to save money using the Savings Fountain principle.
Through a series of odd analogies I’m going to outline how I visualise the flow of my savings using something called the Savings Fountain.
So without further ado, here’s the Savings Fountain:
Now to explain what the hell this is all about.
Spurting out of the top you’ve got your salary or, if you’re self-employed, the income from your main business.
The tiers reflect how you prioritise your spending. The image above shows how I choose to prioritise mine, but how to save money is a personal thing. The invest v overpay the mortgage debate is a fierce one. And, of course, you don’t have to completely neglect one at the expense of the other.
Tier One: Pension
Tier one for me is my pension. This is largely because it comes out of my salary, through salary sacrifice, before it hits my bank account. I contribute 15% of my salary into my pension. This still leaves me plenty of water to flow down to the lower levels.
Tier Two: ISA
Next we have ISA savings (these are tax-advantaged savings accounts in the UK). You can put £20,000 into this per year. I am fortunate that I can afford to max out my ISA. I do this via a regular monthly payment of £1,666,66 into a stocks and shares ISA.
Personally, I think if you’ve got the money to put something into a stocks and shares ISA it’s well worth it. Whether you do this completely at the expense of putting something into the lower tiers or whether you apportion your savings is an individual choice.
Tier Three: Mortgage Overpayment Pool
The final tier for me is the mortgage overpayment pool. Strictly speaking, I haven’t 100% settled on what to do with any savings that flow into this trough. For example, I might decide to convert my loft before I start to pay off my mortgage. But notionally, I keep this money in cash with the view to using it to overpay the mortgage.
For some people, this tier might be non-tax advantaged investments instead. They may have more than three tiers. With mortgage interest rates as low as they are, I’ve chosen to pay as much as I can into my ISA before I put anything into this tier.
Barely any “water” flows into this bottom tier from my salary alone. The pool is rather dry at the moment. That’s where the “Side Hustle Hose” comes in, as to which, see below.
The Ecology of the Savings Fountain
Let me explain the other characters that feature in the Savings Fountain environment…
The Expenses Birds
The Expenses Birds represent all of the demands on your salary. They are all of your usual monthly outgoings. The thirsty little things drink up your money and govern what you can save.
The Cost-Cutting Cat
You don’t want to let those Expenses Birds get out of control. The Cost-Cutting Cat stalks the Savings Fountain and puts off all but the most persistent of birds. Either those that a) have no choice but to drink at the fountain (your mortgage, utlities, basic groceries etc.) or b) those that want to drink there so much that they are willing to risk the Cost-Cutting Cat (these are the financial vices you’ve decided to embrace).
The Cost-Cutting Cat also stops the Expenses Birds from getting fat and complacent. The analogy here is making sure your essential expenditure is always as low as possible – use price comparison sites, haggle with utility providers etc.
The Heron Bucket
One of the more bizarre pieces of imagery I use.
The heron is a particularly large expenses bird. He represents larger, irregular expenses (holidays, replacing a laptop, house maintenance etc.) that could skewer what you save in a given month.
I don’t like my savings ecosystem being thrown out in this way so I create a couple of separate funds for these larger expenses: the frivolity pot (for holidays and such like) and the house maintenance fund.
Collectively I think of these as the Heron Bucket.
I fund them by putting away a small amount every month into two regular savings accounts. When the accounts mature at the end of the year, this becomes my frivolity pot/house maintenance fund for the forthcoming year. I can dip into it for those big expenses without it coming from my salary for that month.
In the context of the Savings Fountain, imagine a prudent gardener taking a small amount of water from the fountain each month, alongside the Expenses Birds, and putting it into the Heron Bucket. When the heron comes along he drinks from the bucket and doesn’t upset the delicate ecosystem of the fountain.
NB: I’m not sure why I chose a heron. I’m sure there are animals that destroy ecosystems far more, but I started to think of a heron and it just stuck.
The Side Hustle Hose
As I mention above, I don’t have much left over for my mortgage overpayment pool from my salary. This is where I intend to try and boost my income from side hustle income – a hose that fills up the bottom tier with more water. This will bolster what I can put towards mortgage overpayment.
Admittedly I haven’t made great strides in this area yet. At the moment it’s largely theoretical other than having started some matched betting.
I have another lot of sub-metaphors for the Side Hustle Hose. Check out my post on the Trickle, the Drip and the Splash.
So that’s how to save money using the Savings Fountain. What methods do you use?