Yes, saving £500 a month in the UK is good! It amounts to £6,000 a year and if this amount is invested properly, it will grow into a very large portfolio over time.
Let’s dive in further!
How Quickly Will £500 a Month Grow?
As I mentioned above, saving £500 a month in the UK can lead to a pretty big portfolio over time. If you’re interested in checking how much that adds up to over the years, try out the savings calculator below.
Savings Growth Calculator UK
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There are 4 inputs to this saving £500 a month calculator:
- Starting Investment: Enter the current value of your portfolio. If you’re just starting out, then you can default it to £0.
- Monthly Savings: The amount you will commit to your portfolio each month.
- Annual Rate of Return: A safe value to use is somewhere between 6% to 8%. If you are extremely conservative, then you can use 4% to 5%. If you are aggressive, you can try between 8-10%.
- Number of Years: How many years you can contribute the £500 per month.
The calculator shows two charts in the result. The first chart shows your portfolio growth over time when you save £500 (or another amount) a month.
The second shows the same thing, but splits out the components in to your cumulative invested capital (dark blue) and market returns (orange). If you invest for long enough (over 30 years), the market returns will far exceed the total cash you have contributed.
You can take these results and see how your current savings compare against others in the UK.
How long will it take me to save £1 million when saving £500 a month?
If you invest £500 per month in the financial markets, your portfolio can grow to £1 million in 35 years if you earn an average 8% per year. If your portfolio generates 6% per year, you can expect to get in 41 years.
If you’d like to try out other options, do check out the millionaire calculator to see how quickly you can grow your savings! A household net worth of £1 million would put you well in the top 20% of households in the UK.
How Much Should I Save Each Month?
It’s great that you’re able to commit to saving £500 each month. However if you haven’t already done so, it’s worth stepping back for a second and asking a few more basic questions: how much should I save each month?
The amount you should save every month largely depends on these goals. For example, if you’re saving to buy a house, the required amount may be different compared to saving for retirement.
Your income also plays a crucial role in determining the appropriateness of saving £500 per month. For someone earning £50k a year, saving £500 means setting aside 12% of their monthly income. That is a good savings target.
Last, but not least, expenses play a significant role in determining how much to save each month. Expenses include the obvious like rent, food, but also things like mandatory debt payments on credit cards.
Higher expenses mean you have less money to save. Therefore, it’s important to assess your monthly expenses and work on reducing unnecessary spending.
Let’s consider an example with some numbers: If you are in your mid-60s, retiring today, and want to withdraw £40,000 annually from your portfolio, you will need approximately £1 million in your portfolio. This assumes that you will live till 100 (~35 years to go!) and that inflation over that period is 2%. The table below shows how much you’ll need to save each month to build up a million pound portfolio.
As you can see, how much you need to save depends on two key factors: time (or your age) and your rate of return. If you can make do with a lower expenses in the future, then of course you will also need to save less to hit your ultimate goal.
Of course if you are young, then you will also have to remember that due to inflation, £40,000 of living expenses in today’s terms will be a much higher figure in the future. If you’re 30 years old now and plan to retire at 65, in inflation-adjusted terms your annual requirement will actually be £80,000.
All of this can be too tough to calculate mentally, so we’ve got a helpful retirement calculator which you can use to plan out in greater detail what your eventual retirement looks like. I recommend giving it a try!
It’s important to set a target savings rate that meets your needs and requirements in the short-term and in the long-term. If your future needs are higher, you may need to step up your savings target to £1,000 per month. Alternatively, if you find yourself constantly struggling to save, then perhaps a few months of saving £100 a month might be okay too.
What’s the best way to invest £500 per month?
The best way to build up a huge portfolio with a £500 a month in savings is arguably through investing. However before we get there, it’s first important to look at the full picture.
- Eliminate debt: As boring and repetitive as it sounds, it makes sense to first eliminate your debt – especially high interest rate debt such as credit card debt or other consumer loans like car loans or those buy-now-pay-later type debt.
- Build Up Your Emergency Fund: Again, another piece of unsexy advice, but it’s important to build up your emergency fund with cash savings that has at least 3 months, but preferably 6 months of expenses. You can invest your emergency fund in a high interest savings account or perhaps even put it in a money market fund.
- Invest it: Finally we get to the most fun piece. It’s important to invest your money in a way that aligns with your needs and risk tolerances. Depending on your needs you may choose to go with balanced funds or perhaps go all out with 100% equity funds. It’s important to manage your portfolio prudently, but being overly conservative is not recommended as you will end up sacrificing long-term returns.
If you need help with this, a good way to start would be to educate yourself and to meet with a financial advisor who has fiduciary duty towards you. They will help you decide how to structure your portfolio. Some people have a preference for capital growth whereas others may want dividend income.
An advisor can talk you through the best options, formulate an asset allocation plan, and help you stick to it.
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Before You Go…
By investing in stocks, bonds, or real estate, individuals can generate passive income and secure their financial future. Compound interest can turn small investments into significant wealth over time, making it an essential tool for those looking to grow their net worth.
Our whole blog is dedicated to help you get on the path of financial freedom. Feel free to browse around and read through the articles. There are plenty of investment books and podcasts that you can use as a learning resource along the way to help you reach your goal faster.
by Jon Craig
I am the creator of Project Financially Free and I started this journey to both educate myself and share my insights on personal finance. I’m passionate about financial literacy and I invite you to join me on this transformative path. See more.