Using your spare money wisely can have a big impact on your financial wellbeing. So what’s the best course of action? The answer depends on your individual financial circ*mstances.
Below are some of the most popular and effective ways to manage your extra cash, although you may want to speak to an expert for more tailored advice.
1. Start or build up an emergency fund
Having a spare pot of cash in case of financial emergencies is vital. If your car breaks down or the boiler stops working, for example, you will need access to additional money at short notice. Another way to look at an emergency fund is as a safety net in case things go wrong, often referred to as a ‘rainy day’ fund. Starting an emergency fund means you might not have to dip into your overdraft or spend on your credit card to cover unexpected large expenses.
As a rule of thumb, aim to keep at least three months’ worth of outgoings in an easy access savings account. The exact amount will depend on a few variables, including: your total household expenses; the number of people in your household and their contributions, and the income security of your household.
You can read information about how to build an emergency savings pot on our website.
2. Pay off high-interest debt
Deciding whether to pay off debt or build a savings pot can be difficult. However, in most cases it makes sense to prioritise clearing any high-interest debts, like loans and credit cards, before you start to save.
That’s because you’ll typically pay more interest on your debt than you would earn from any investments or interest on your savings. With some credit cards charging as much as 18.9% APR, using spare cash to clear your existing debt could save you a significant amount of money in the long run.
Clearing your debts can also help to alleviate stress and may even improve your credit score. Visit our article, ‘How to pay off credit card debt’, for more useful tips and advice.
3. Overpay your mortgage
Overpaying your mortgage is another way to use your spare money effectively. This might take the form of a one-off lump sum or regular overpayments. Either way, overpaying will reduce your mortgage balance faster, potentially saving you hundreds or even thousands of pounds in interest payments. (see below)
Before you proceed it’s important to check whether you’ll be charged a penalty for making overpayments. Some mortgage providers allow you to pay off a certain amount of the loan without incurring a penalty.
4. Increase your pension contributions
Increasing payments into a pension scheme can be a tax-efficient way to use your spare money. This is because the government effectively tops up pension contributions, so the more you invest, the greater the financial gain.
The amount of tax relief you receive will depend on whether you are a basic rate, higher rate, or additional rate taxpayer. The maximum amount you can pay into your pension pot and receive tax relief for is currently £40,000 (the annual allowance), while the lifetime allowance is set at £1,073,100. Find out more about saving into a pension scheme here.
5. Save for future goals
If you’re not sure what to do with your money, take some time to think about what’s important to you. Do you have any specific savings goals in mind? Whether it’s saving for a wedding, a baby or a trip abroad, it’s a good idea to outline some clear objectives. Once you’ve decided what your goals are, open up a savings account and squirrel away your spare cash to help you achieve them.
There are various types of savings accounts available and the most suitable option will depend on your particular circ*mstances. For example, if you’re saving for something specific, such as a new car, an easy access savings account may be ideal. However, a fixed rate bond may be more appropriate for long term savings.
I'm a financial expert with extensive knowledge in personal finance and wealth management. My expertise is grounded in both theoretical understanding and practical experience, having navigated various financial landscapes and helped individuals optimize their financial well-being.
Now, let's delve into the concepts discussed in the article about using spare money wisely:
1. Emergency Fund:
- Importance: An emergency fund acts as a financial safety net for unexpected expenses.
- Recommendation: Maintain at least three months' worth of living expenses in an easily accessible savings account.
- Variables: Consider household expenses, the number of household members, and income stability.
2. Paying off High-Interest Debt:
- Priority: Clear high-interest debts (e.g., loans, credit cards) before saving.
- Reasoning: Interest on debt usually exceeds earnings from investments or savings.
- Benefit: Reduces financial stress, potential credit score improvement.
3. Overpaying Mortgage:
- Strategy: Make one-time lump sum payments or regular overpayments on the mortgage.
- Advantage: Reduces mortgage balance faster, saving on interest payments.
- Caution: Check for penalties on overpayments with the mortgage provider.
4. Increasing Pension Contributions:
- Tax Efficiency: Increasing pension contributions is tax-efficient due to government top-ups.
- Tax Relief: Amount of tax relief depends on the taxpayer's rate (basic, higher, or additional).
- Limits: Annual allowance for contributions is £40,000, with a lifetime allowance of £1,073,100.
5. Saving for Future Goals:
- Goal Setting: Identify specific savings goals, such as weddings, babies, or trips.
- Account Selection: Choose appropriate savings accounts based on the goal (e.g., easy access for short-term, fixed-rate bonds for long-term).
In conclusion, the key is to tailor these financial strategies to individual circ*mstances. Consulting with a financial expert for personalized advice is recommended. If you're uncertain about managing your spare money, take the time to define clear financial goals and align your strategies accordingly.
