The pandemic has reportedly created 6 million accidental savers, but what’s the best way to use this extra cash?
The effect of the lockdown on millions of bank accounts has been to boost savings for people whose incomes have remained the same but whose spending has dropped. With the prospect of life returning to a new normal, it’s a chance to think about how to make the most of these savings and build on them too.
Where were savings made?
Working from home meant the cost of commuting was put on hold. Holidays were not booked, and the closure of restaurants, bars and entertainment venues cut spending in those areas, resulting in slightly healthier current accounts.
All this, the Bank of England estimates, resulted in over £125 billion saved in 2020. Its survey does note that only a fraction of this is likely to be spent by households, suggesting a cautious approach.
This is understandable given the drop in income for furloughed employees, the loss of income for the unemployed and an unstable job market.
Ways to make the most of your savings
There are some useful ways to use any extra money saved during lockdown:
- Pay down debt – if you have lingering debts (particularly with high interest rates), whether they’re credit cards or loans, consider using your extra cash to help eliminate them for good.
- Build an emergency fund – this fund should contain enough to cover the essentials for a month (like bills, food and your rent or mortgage payments) if anything were to happen affecting your income. Consider opening a separate bank account — easily accessible to you — to store your fund.
- Mortgage overpayments – you could make regular overpayments on your mortgage, reducing its overall term length and the amount you owe on the loan. Check with your mortgage company about their terms and conditions relating to overpayments.
Investing your lockdown savings
Leaving your savings in a high-street bank account won’t build much interest. But there are options out there for those who want better returns on what they’ve saved:
- Invest in a stocks and shares ISA – not only will any dividends paid to you be tax-free, but any gains will also be exempt from capital gains tax.
- Contribute to your private pension – this comes with the benefit of tax relief status on your contribution if you’re a taxpayer.
A great place to start with all of these options is to create a ‘spending plan’ that tracks your income every month compared to your spending, allowing you to work out how much you can put aside.
If you would like advice on the best ways to invest your money, or any another area of finance that has been highlighted here, please get in touch with us.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested