Brits have stashed away an extra £180 billion in savings during the pandemic. If you built up some extra cash in the last year, here are some ideas for what to do with it.
Brits have stashed away a mountain of cash during the pandemic. It makes sense – people have had to stay home and thus saved money on eating out, going to the pub and big holidays abroad. If you were one of those lucky enough to build up some extra cash during the past 15 months, chances are you’ve asked yourself what you should be doing with it.
Here are four sensible things you can do with your lockdown savings.
Pay down debts
This might be an obvious one, but it’s worth mentioning. While it’s important to have an emergency supply of money, just in case the boiler breaks, it might be worth using some of your excess cash to pay down your debts, particularly if you are being charged lots of interest. If you don’t have any credit card debt or personal loans, it might be worth paying off your mortgage. By doing so, you may be able to reduce your term and therefore the overall level of interest you’ll pay. That might be a sounder idea than leaving it in a savings account earning less than 1%. However, before you do that, check your deal’s terms and conditions to make sure you don’t have to pay any fees for overpaying your mortgage.
Make a rainy-day fund
Once you’ve covered high-interest debts, the next thing to do is build up your ‘rainy-day’ fund. This fund is essential whether you’re working or retired. If you’re working, loss of income from redundancy can have a fast and unanticipated impact on your finances. Saving between three and six months’ worth of your salary is ideal to cover your costs while you look for a new job. If you’re retired, having a rainy-day cash fund can be vital if you’re drawing an income from your pension or ISAs and the markets take a dip. Selling investments to fund your lifestyle in a bad market crystallises losses and will leave your portfolio permanently worse off. Instead, a cash buffer will tide you over while markets recover.
Put it in your ISA or pension
If you have the first two ideas covered already, the next thing to think about is whether that cash can be sheltered tax-efficiently. Make the most of your annual ISA allowance, or even contribute more to your pension. That cash can be put towards investments to grow and bolster your long-term wealth. Saving in cash is only really a good idea if you need the money in the short-term (I.e. for a rainy-day fund). Anything else that is earmarked for long-term wealth growth should be working harder as an investment.
Spend some of it
Finally, it is okay to actually spend some of the money you’ve saved. Of course, do that in a responsible way. Does the dining room need redecorating? Maybe you want to take a quick holiday somewhere warm? Spending money shouldn’t be taboo when it is well-spent (and sometimes going for a slap-up dinner comes under that too!). Just make sure you’ve got your debt under control and your emergency cash pile in place first.
There are of course other tax-efficient considerations to make in this circumstance, such as gifting to loved ones if you are in a position to do so. If you’d like to discuss the ideas mentioned in this article more, don’t hesitate to get in touch with your adviser.