Should you spend it or save it?
A huge number of people are undoubtedly struggling due to the lockdown, with salaries cut for those on the furlough scheme, an increasing number or redundancies and income lost completely for many self-employed.
But for those who have carried on working, especially those who have been doing that from home, then expenses have likely reduced dramatically, with no or little spend on commuting, lunches and snacks.
And even if, like me, you already work from home and didn’t spend on those things every day, there’s been hardly any spending on social activities too. I’d usually have spent on eating out, trips to the pub, tickets to the theatre and holidays. But all that has gone.
Yes there have been some extras costs, but not too many. Energy bills are obviously up. Food is another area. I’ve had more takeaways than normal to support local businesses and spent more at the supermarket – but the total is a fraction of what I’d have normally spent in pubs and restaurants.
So that means I’ve got more cash, and many of you will too. So what should you do with it?
Keep reading or watch this video for my top tips.
You can also listen to a discussion on this topic on my Cash Chats podcast.
Clear your debts
Tackling debt is the first thing to do with any spare money you have. Ideally, put as much of your extra money towards the debt with the highest interest rate as that’s the one which will be costing you more money.
I know some people might want to prioritise putting money into savings over clearing debts, with the emergency pot giving some sense of security. But doing this will be costing you money.
Even if you have the best possible rate of interest on your savings, it’s going to be a fraction of what you’re paying on the debt.
If an emergency does come along and you don’t have savings available you can always then look to borrow on a credit card or via a loan.
Yes that’ll cost you money, but until that happens – if it happens – it’s better to have no debts and no savings than pay interest on debts.
Build an emergency savings pot
Once debts are cleared, or if you don’t have any, then you can start building up your emergency savings.
Your finances might have escaped the pandemic with little damage so far – but that could change. A recession is on its way and there will be job losses.
Or even if your income is secure, something else could happen. Your washing machine could break, roof need replacing. You get the gist.
So it makes sense to build up a decent buffer just in case. The golden rule is to aim for three to six months of expenses, though if that feels unrealistic then go for whatever you can afford.
You’ll want to put this money in an account with a couple of features. The most important is that it’s easy to withdraw. This means it needs to be in an easy-access or short notice account.
Second, aim for the best interest rate you can. Though these have continued to fall, you should be able to get at least 1%, if not more.
Save some more
That emergency pot should be for emergencies. Not a holiday (when we’re allowed to go again), or a new iPhone, or anything else you wouldn’t normally be able to pay for out of your salary.
So think about those purchases you’d like to make in the next few months or even later in the year (such as Christmas and birthdays), and put money away for that too.
Don’t forget the support measures put in place by the Government will need to be paid for somehow, so we could also see an increase in the cost of living or less take-home pay due to further taxation.
Depending on when you want to use this money you might be able to lock it away in a fixed-rate savings account. In theory, you should be able to get higher interest rates this way, but do check.
If you’re thinking of saving for home deposit then look at Lifetime ISAs which will give a 25% bonus (up to £1,000 each year) – though they are for first-time buyers only.
Put money away for the long term
Right, debts sorted. Savings sorted. What next? Well, you’ve got a few options. There’s not much point having any additional money in easy-access savings as the interest rates are generally so poor.
Historically the best returns have come from investing your money – and that could be in a Stocks & Shares ISA or your pension.
If you choose either of these then you run the risk that the money could go down in value, so bear that in mind, With both you’re also limiting your access. With investments, the advice is at least five years. With pensions, it’s until you are 55 years old.
You’ll get tax relief on any pension contributions you make, so a basic rate taxpayer adding an extra £100 to their pension would actually see the fund topped up by an extra £20.
I’d definitely check whether you’re getting the full matched pension contributions from your employer, and if not put some of the extra money there so get more of this free cash.
Overpay your mortgage
The option which I find appealing is overpaying my mortgage. I had planned to restart overpayments on my mortgage in March (after two years where moving home and renovations meant we didn’t have the spare cash).
However, I didn’t go ahead when the crisis broke. – I wanted to see just how it affected my cashflow. Restarting these extra payments will not only mean I clear my mortgage sooner, but will also reduce how much I’ll pay in interest.
Now this isn’t necessarily the option which will get you the biggest return in the long term. Interest rates are very low on mortgages, so if you can remortgage to one of these and then can beat that rate via investments you’ll make money.
Plus, it’s worth remembering that it’s harder to get that cash out of your property if you need it later on. Ideally a mix of mortgage, investments and pensions is probably the best course of action.
Spend it
Ok, the final option is something which I can see appealing to most people is treating yourself, whether online or getting out to the shops when they reopen.
And as long as you don’t have expensive debts then I don’t see any problem doing it. But it really should be in moderation and alongside building your savings and thinking about your future.
If you can, I’d encourage you to support retailers that are struggling or at risk of going under – both national and local.
Remember, shopping around and other hacks will help any spending money you have go that little bit further.