What to do with money

The coronavirus pandemic may have wreaked havoc on the economy, but lockdown measures and changing spending habits mean many people have more money in the bank. If you have some unexpected savings, you may be wondering what to do with your money. 

Whether you want to save for your future, try your luck on the stock market or splash out on a holiday, we have ideas and tips about what to do with your money to suit a range of budgets. 

What should I do with my money?

With so many options to choose from, deciding what to do with your money can be daunting. But this doesn’t have to be the case. If you focus on the basics, there are five main things you can do with your spare cash:

  1. Spend it
  2. Save it
  3. Invest it
  4. Give it away
  5. Pay taxes

Let’s look at each of these options in a bit more detail.

Spend it

If you’ve accumulated some extra money, why not treat yourself? Buying material goods can be rewarding provided you can afford it, it’s something you’ll use, and you’ve researched the best price. Spending money on experiences can provide even more satisfaction and create lifelong memories. Read our guide – What to spend money on – for more spending-related tips and advice. 

Save it

Whether you want to create a ‘rainy day’ fund or save for something special, it’s a good idea to build up a savings pot. Not only will it provide you with more financial freedom, but it will limit your debts and provide a security net in case of emergencies. There are a range of different savings accounts available, so be sure to do your homework to find the most suitable product. 

Invest it

Investing your spare cash can be an effective way to grow your wealth, provided you’re comfortable with the associated risk. You can purchase shares, cash, property or bonds which typically allow you to generate income over the long term. You could potentially sell these investments at a later date for profit.

Give it away

Giving money to charity is a great way to spend your money. Regardless of your cash stores, donating even a small amount to those who are less fortunate can be an enriching experience. What’s more, charitable donations also qualify for tax relief. This means you can deduct them from your total taxable income, thereby reducing your tax liability.

Pay taxes

It was Benjamin Franklin who famously said, “nothing is certain except death and taxes” a sentiment that still rings true today. Like it or not, paying taxes is an inevitable part of life. While you can’t (and shouldn’t) avoid it, there are steps you can take to mitigate your liability (see charitable donations above). 

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What to do with money: our pick of the best ideas

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 circumstances. 

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 circumstances. 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. 

6. Utilise your ISA allowance

Despite being less competitive than they once were, ISAs remain a staple of many people’s savings portfolio. As they’re tax-free, ISAs may be a good option if you have a significant amount of savings or you are an additional rate taxpayer. Anyone can currently save up to £20,000 in an ISA every tax year and the funds won’t be liable to income tax or capital gains tax. 

7. Explore investment opportunities 

If you don’t need access to your spare cash in the short term, then you might want to think about investing it. Investing can take various forms, including buying stocks and shares. Investing in the stock market can be a good way to maximise your returns, although it comes with significant risk. 

Stocks and shares aren’t the only investment opportunities. You could also use your extra savings to invest in tangible assets such as antiques, fine art, wine, and precious metals. If you have a sizable amount of spare cash, property investment may be another option. There are several different ways to invest in property in the UK.

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Still not sure what to do with your spare cash?

If you’re still thinking “what should I do with my money?”, then it’s a good idea to speak to an independent financial adviser (IFA).

An IFA can help you with a variety of personal finance matters, including retirement planning and wealth management. After looking in detail at your finances, they will recommend a range of options tailored to your specific needs and goals. You’ll need to pay for your tailored financial advice, but if it increases your prosperity in the long term then consider it money well spent. 

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