Has lockdown left you financially better off? Here’s how ”accidental savers” can put their cash to work
Though many have suffered financially due to lockdown, some consumers have seen their income exceed their spending and have beefed up their bank balances as a result. If your savings have received a boost, here’s how you can put your cash to work.
The pandemic has left many people in a truly dreadful financial position.
In October, one in three adults expected their household income to fall during the next six months, while 25% expected to struggle to make ends meet, according to the Financial Lives Study by the city watchdog, the Financial Conduct Authority.
Yet if you have been lucky enough to avoid furlough, unemployment or your business disappearing, your income may have exceeded your spending.
Millions of households actually have more spare cash, after assorted lockdowns forced us into frugality.
Suddenly, many costs completely disappeared, from commuting, eating out and impulse shopping to socialising, hairdressing and holidays. Even key workers who continued going out to work may have had little time and less opportunity to spend.
As a result, debt has dropped while savings have soared. Last April alone, during the first full month of lockdown, households repaid a record £7.4 billion in consumer credit – the largest net repayment since records began in 1993, according to the Bank of England.
The Bank of England reported savings balances grew by nearly three times as much in 2020 as compared to the year before
Set inspiring financial goals
Rather than letting coronavirus savings melt away in takeaway food and endless Amazon deliveries, use the money towards your financial goals.
Start by thinking what would fire you up financially: perhaps tackling debt, getting hitched, going on a far-flung holiday, buying your dream home or heading off into retirement.
Make it manageable by breaking it down into smaller chunks. Less “Where can I find £25,000?”, more “How can I save £250 a month?”.
Identifying a clear goal and practical steps to get there will help keep you motivated and may even encourage you to save more.
Turn your goals into reality
While you're feeling inspired, put your plans into action.
First, see if you could boost your savings, perhaps by swapping to cheaper energy, phone and insurance deals, or cancelling unwanted subscriptions, Compare the Market can help with the first three.
Then set up a direct debit straight after pay day, to chip away at your credit card balance, siphon off savings or pay into a pension every month. That way, the money won’t linger in your current account, tempting you to spend.
Deal with debts
You’re likely to get the biggest bang for your buck by paying off debts with expensive interest rates, such as credit card balances and overdrafts.
Even if you can’t clear your balance in one fell swoop, switching to a 0% interest balance transfer card could save you hundreds in interest.
Just remember the 0% interest free period will only last for a limited time before higher interest rates are charged. So, it’s important that you try and clear the balance before it ends. If you can’t pay off the full balance within the 0% interest free period, you might want to switch again before it ends. And don’t forget to pay at least the minimum payment each month or you could lose any promotional rates.
Once pricey debts are dealt with, overpaying your mortgage can also save masses of interest.
Most lenders will let you overpay up to 10% a year without penalty. Regular overpayments really do mount up but you should make sure that any overpayments go towards reducing the mortgage debt rather than reducing your monthly payments.
By hacking away at your mortgage, so you owe less compared to the value of your home, you may also be able to nab lower interest rates when re-mortgaging in future.
Shore up savings
Perhaps coronavirus has rammed home the need for rainy day savings, or the deposit for a new place. Make the most of your money by checking for best-buy savings accounts and stashing some cash.
If you’re not sure how much you can afford, consider using one of the automatic savings apps, which set aside small sums each week.
If you’re under 40 and saving for your first home, you could nab some extra cash by using a Lifetime Individual Savings Account (LISA). You can save up to £4,000 a year in a LISA towards a first home or retirement, and the government will chuck in a 25% bonus on top, worth up to £1,00 a year. But you can only take your money out of a LISA if you’re buying your first home or aged 60 or over, otherwise you'll be charged a withdrawal charge.
Plan long term too
For longer term financial goals, more than five years ahead, investigate investing in the stock market.
Interest rates on savings are rubbish right now, little better than sticking money under your mattress. If you can stomach seeing your balance bounce up and down, then by taking more risk, you can hope for higher returns. Just be aware that with investing you could get back less than you put in or even lose all your money, so don’t use money you need to pay your mobile bill next week.
Pensions are brilliant for retirement goals, because you get free money added in tax relief, plus employer contributions when paying into a work pension. However, you can’t touch money inside your pension pot until you reach 55 at the earliest, likely to move to 57 after 2028.
If you might want to whip money out sooner, consider investing within an individual savings accounts (ISA), where your balance can grow untouched by the tax man.
3 things to do right now...
Prioritise paying off debts such as credit cards and overdrafts with expensive interest rates first. Even if you can’t clear your balance in one fell swoop, switching to a 0% interest balance transfer card could save you hundreds in interest. Just remember the 0% interest free period will only last for a limited time before higher interest rates are charged – so make a note of the expiry date.
Pay yourself automatically - a lot of people say they can’t save because they don’t have any cash left at the end of the month, so always pay some money into your savings accounts and investment products by standing order each month when you pay your bills. It means the money is out of your account before you’re aware of it and you have to live on what’s left over. After a while you hardly notice the difference as you’re so used to living on a lower amount.
Make the most of your money by checking for best-buy savings accounts and stashing some cash. If you’re not sure how much you can afford, consider using one of the automatic savings apps, which set aside small sums each week.
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Don’t forget that while you may think that this article is brilliant, it is intended for information purposes only and should not be mistaken for financial advice or recommendations.
Read more about cash ISAs with Compare the Market