July 30th, 2021
5 practical ways to make the most of your lockdown savings
During 2020, there were long periods where you couldn’t leave your home and do the things you wanted. However, it’s quite possible that your savings grew all the time that you weren’t eating in restaurants or heading off on holiday.
Unbiased has reported that 85% of UK adults managed to spend less during lockdown. The average Brit has reportedly saved £617 a month thanks to a reduced demand for petrol, high street shop closures, and fewer trips to the local pub.
Investment firm Hargreaves Lansdown say that, across the nation, we deposited £184 billion into savings accounts in the 12 months leading up to March 2021. That equates to almost three times as much money put into savings compared to the year before.
But since you haven’t been splashing out on smoked salmon dinners and trips abroad, what could you use your extra savings for? It could be worth planning far into the future and thinking about contributing a little extra to your pension, or perhaps you need an emergency fund for life’s unexpected costs?
Read on to find out how best to use your extra lockdown savings.
1. Paying off debt should be a priority
If you have managed to save a little extra but you also have unpaid debts, your priority should be to pay them off. Start with the most expensive and work your way down, as interest rates for debt are often much higher than interest rates for savings.
The following infographic from Martin Lewis of Money Saving Expert expresses exactly why.
2. Create an emergency fund
Once you have paid off your debt, consider building up an emergency fund. Essentially, an emergency fund is a separate store of money with the specific purpose of being used for unexpected expenses.
And because you can’t predict the future, life is full of them. From your car breaking down to your boiler failing, you could face unexpected costs at any time. A separate chunk of your savings should always be kept on hand just in case something goes wrong, and you should always top it up after using it.
3. Think about ISAs as a way to save for the future
If you have reduced your debt and set aside a fund for emergencies, it’s then worth thinking about investing for the future. You can do this in a few different ways, be it on the stock market or through various savings accounts.
Consider opening an ISA if you don’t already have one. They should be a saver’s first port of call, since they are incredibly tax-efficient. This is because you don’t pay Income Tax or Capital Gains Tax on any interest earned in an ISA.
There are several different types of ISA and the two most common are Cash ISAs and Stocks and Shares ISAs. In the 2021/22 tax year you can pay up to £20,000 into ISAs and split this money as you wish between the various types. Note that you can also only contribute to one ISA of each type.
Cash ISAs work like traditional savings accounts so, while they are low risk, interest rates are typically low.
A Stocks and Shares ISA works differently. They come with the potential for higher returns on your savings, but not without risk. Any money you put into a Stocks and Shares ISA is invested in a range of different investments, so the value of your ISA will rise and fall.
Saving into an ISA can be a tax-efficient way to grow your wealth. There are several types of ISAs available, so speak with a financial planner to decide which one is right for you.
4. Paying into your mortgage can save you more in the long run
Much like paying off outstanding debt, paying off your mortgage earlier could save you more in the long run. This is particularly true if your mortgage interest rate is higher than that of your savings.
Paying more to your mortgage can help you reduce the total interest you pay, and repay your home loan more quickly. This can give you a little more freedom and security and, of course, takes away a large monthly payment.
Bear in mind that not every mortgage will let you pay additional sums off early, or there may be costs tied to doing so. This is especially likely if you have a fixed- or discounted-rate mortgage.
Secondly, once you’ve committed more to your lender, it is harder to then access this money should you need it later on. It isn’t like a savings account or ISA, where you can typically withdraw it at any time.
Speak to us to figure out whether this is the right thing to do. We will take into account your overall financial situation and personal goals when considering the best way to make the most of your savings.
5. Paying into your pension allows you to enjoy a stress-free retirement
You could also use your lockdown savings to prepare for the much longer-term. Much like paying extra to your mortgage, paying into your pension is also an investment into the future with significant benefits.
Considering you receive generous tax relief and potential employer contributions, a pension is an extremely efficient way to save for your future. Also, with compound returns on your pension savings, it will continue to grow over the long term.
By paying more now, you can also reduce your stress levels in later life. When you retire, you rely on the savings you contributed throughout your life, so the more you have, the less you can worry.
Despite these benefits, it’s worth remembering that a pension is also inflexible; you cannot access these savings until you are at least 55 – rising to 57 in 2028. Speaking to us will help you decide whether this is the right thing to do.
Keep up your lockdown saving habits
Lastly, the heavy restrictions on all aspects of our lives during lockdown has made it a memorable time for all the wrong reasons. That being said, it may be a good idea to continue your lockdown saving habits.
Lockdown has proven to many of us how much we spend unnecessarily. Though it may be tempting to head straight out night after night, consider reining in your luxury expenses. By keeping up your lockdown saving habits with careful financial planning, you will be able to maintain a high level of saving going forward.
Combined with taking some of the other steps discussed above, you may be able to save more year-on-year and truly exit this pandemic financially stronger than you went in.
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The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.