Over lockdown I’ve been lucky enough to keep my job and I’ve also been spending less. For the first time in my life this means I’ve got some money put by. I’d like to treat myself to something special (I have my eye on some very nice headphones), but I also want to put the rest of my unexpected nest egg to good use - where do I start and how much should I put aside? I’m 30, live in Leeds and earn about £30,000.
It’s nice to hear that you’ve been able to save in lockdown, and for the first time have built up some savings. Well done! It’s also great that you’re looking to put your money to good use.
It can be overwhelming when you first start saving, with so many options out there of what to do with your cash. Here are some good places to start.
Got high-interest debt? Clear it first
If you’re currently paying interest on any form of debt like an overdraft or credit card, then it’s worth clearing it before putting your money into things like savings accounts.
This is because the interest charged on credit cards and overdrafts is usually much higher than the interest you’ll earn from savings - typical credit card interest is around 20% at the moment, while overdrafts can range up to around 40%. Compare that to the top savings accounts where right now you’d be lucky to earn 1.5%, and you can see that it makes sense to clear pricey debts before saving.
This can seem counterintuitive as you might feel like having cash in savings gives you a safety cushion. However, you can clear your credit card or overdraft balance and still keep the account open or overdraft limit available. This means you’ll still be able to spend money on it in an emergency, you just won’t be paying interest (if you have no debt).
Want to buy a home? Think about a LISA
If you’re looking to buy a first home at some point, then it’s a no-brainer to open a Lifetime ISA (LISA), which is just a special type of savings account. As you’re 30, you’re able to get one (they’re available to anyone aged 18-39).
You can save up to £4,000 per tax year into a LISA, and then the real selling point is that the state gives you a 25% bonus on top, which you can claim every year. So, save the maximum £4,000 into it and you’ll end up with £5,000 (plus a small amount of interest). The bonus is paid on money you add until you’re 50, and you can use money in your LISA after 12 months to buy a house worth up to £450,000.
Be aware that usually there’s a penalty for withdrawing money for anything other than buying a first home (or retirement, but LISA’s aren’t best for this for most), though the penalty has been removed until April 2021 due to coronavirus.
Consider investing, but do your research
If you’re prepared to risk losing some of your money for the possibility of higher returns than cash savings, then investing could be for you.
Essentially, investing means buying things you think will grow in value. Examples of investing include buying individual shares in a company, funds, property or even things like art and antiques.
Investing should only be done over a long term, at least five to ten years - this helps let you ride out any fluctuations in the stock market. It’s very important to do your research before investing, and know that there’s a chance you could lose money. That being said, investing over the long term has provided better returns than cash historically, so it’s worth looking into.
Before you consider investing, you should make sure you have an emergency fund of at least three to six months worth of expenses in cash (see below for where to put this money) for anything unexpected that might come up in the future.
If you decide that investing is for you, you could sign up to an investment platform. There are lots out there, and it’s important to know what fees you’ll be charged before you sign up. Examples of platforms include Wealthify and Wealthsimple, both of which you can access through the Starling Marketplace.
It’s important to remember that if you do choose to invest, the value of your investments may go up or down. Returns are not guaranteed.
Make your money work for you
Once you’ve been through the options above, it’s worth figuring out what to do with any money left over.
There are lots of different kinds of savings accounts, but the key thing is that you get the best return possible by looking for the top-paying ones. Here are some of the different kinds of savings account out there:
Easy-access savings - these accounts do what they say on the tin and let you access your money whenever you want to (though some have a minimum withdrawal amount or limit you to a certain number of withdrawals per year). It’s worth keeping your emergency fund in one of these.
Fixed-rate savings - with these you lock your money away for a fixed amount of time, generally six months to five years. These generally pay more than easy-access savings although the gap between them has lessened in recent years. Think carefully if you want to do this, it’s only worth doing if you want to lock your cash away and don’t think rates will increase before your fix ends.
Regular savings - these accounts let you save up to £250 - £500 in them each month and generally pay higher interest than the accounts above. To get the top rates you need to have a current account with the banks that offer them, but there are some decent options that are open to everyone.
Other options include certain current accounts that pay interest on small amounts, though these are nowhere near as generous as they used to be. Or ISAs, which work in a similar way to the accounts above. Websites such as Savings Champion and MoneySavingExpert list the top-paying accounts for each type.
Whichever type of account you get, make sure you know what your interest rate is. Keep an eye on them over time, because they can go down. It’s worth checking in once a month and staying on top of any emails/letters you get from your provider to warn of rate drops.
PS - get a deal on your headphones if you can!
Ok, so not strictly about what to do with your savings, but your comment about buying some nice headphones caught my eye.
Before you buy them, make sure you shop around by checking a few different websites and check for any discount codes available on sites like VoucherCloud, HotUKDeals or VoucherCodes, or cashback on Topcashback or Quidco - it’s always nice to save a few quid, and you can add any savings to your nest egg.
The above article is intended as general information and does not constitute advice in any way. You should take independent advice if you have any questions about your specific circumstances.