Since I was a kid I’ve been told to save. Every birthday or Christmas I’d pop down to the building society and put away a handful of pound notes.
As an adult I have also followed this principle to a lesser or greater extent, depending on how flush I was. But not anymore. I think saving is dead. Well, mostly.
I have several savings accounts dotted around the place, but most of them pay less than the rate of inflation, so I am literally losing money having my cash locked up. I’m not suggesting that everyone goes out on a massive spending spree, but I do think there are more useful ways of using your money if you’re lucky enough to have spare cash at the moment.
Pay off your debts
Even the cheapest credit cards are charging interest rates of 20% APR, often much higher. So if you’ve got any kind of credit card balance, paying some or all of that off makes much better financial sense than saving. The same goes for bank overdrafts, which tend to be an eye-watering 40% APR or more at the moment.
Paying off personal loans and car finance can be trickier because they often don’t allow overpayments and may charge a penalty if you want to repay them early, but it’s worth checking with your lender to see what your options are. And if you’ve got a number of different debts, think about consolidating them into one loan with a lower interest rate and an easier to manage single monthly payment.
If your mortgage allows you to make over payments this is also worth considering. Even though mortgage interest rates tend to be much lower than other lending, it’s usually the biggest debt most people have. Making a dent by paying off more can drastically reduce the length of your mortgage term and the amount you pay overall.
Get a LISA if you’re saving up for a house
Ok, this is a savings account, but probably the only type worth having at the moment. Even though most cash lifetime ISAs (LISA) still pay a pitiful interest rate, the government will add a 25% bonus to anything you save. If you save the maximum £4,000 a year, for example, the government is effectively giving you an extra £1,000 on top, so the interest earned is just gravy!
There are a few conditions to be aware of: you need to be 18 or over and under 40, you should be a first-time home buyer, and you need to have had the LISA for at least 12 months before buying a property with a mortgage. Originally you could only withdraw the money when buying your first home, but the government has loosened these rules for people struggling financially during the Covid-19 outbreak.
You can also use a LISA to save towards your retirement and benefit from the same government bonus. However, you’ll have to wait until you’re 60 before you can touch the cash and many experts believe a pension is still better for most people. Check out the pros and cons of retirement LISAs here.
You should only consider a LISA if you are saving up for a home or for retirement as the rules stipulate this is the only way to unlock the government bonus. Sadly I’m too old for a LISA!
Put more in your pension
A pension is arguably one of the most tax efficient ways of saving, but of course you can’t normally touch the money until you’re 55, so this is longer-term planning.
It can be particularly beneficial if you have a company pension where your employer matches your contributions, because often the more money you put into your pension, the bigger the chunk they add as well.
Pensions give excellent upfront tax relief, but when it comes to withdrawing, the rules and tax implications get more complicated. I still struggle to understand all the options, so if you do too, it’s best to talk to your pension provider or your HR department if you have a company scheme to find out what’s possible. You can also check out The Pensions Advisory Service.
Saving for a rainy day?
It is sensible to have something put away for emergencies, whether it’s for covering an unexpected bill or a cushion if there’s a hiccup in your income. The equivalent of three months’ salary is usually the rule of thumb. If you follow that route, find the best paying instant access cash ISA possible to benefit from tax-free savings and think of it for emergencies only.
Equally, if you’re planning a new purchase, putting money aside for a few months to save up is always more sensible than taking out hire purchase or putting yourself in debt on a credit card.
It’s also worth taking a look at what you’re actually spending your money on at the moment, like our Undercover Money Reporter did, because you might find yourself with even more spare cash by getting rid of unnecessary expenses.
I’m not saying that the savings habit is dead forever, but while interest rates are so ridiculously low, it makes sense to consider what else you can do with your money to strengthen your financial position. For me, I’m going to put more into my pension on a monthly basis and I’ll be cashing in an ISA with a derisory 0.25% interest rate to pay off a bit more of my mortgage.
After that, who knows, but until the world comes back to some sense of normality – which could be a while – I will be actively monitoring my money to make sure I make the most of what I have.