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What should you do with the leftover cash from your April pay packet?

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27/04/2020
Some lucky people whose jobs are safe, and wages haven’t been hit during the coronavirus crisis, could find more money than usual leftover from their April pay packet.

With the country confined to their homes, many households have seen their outgoings fall dramatically as a result of no daily commute, no eating out in pubs or restaurants, and shops being shut.

Research from the Centre for Economics and Business Research (CEBR) last week suggested average monthly household spending is £795 lower than before the lockdown measures were introduced.

The questions is: what should people do with this extra cash?

Create a rainy day fund

There are a whole host of savings and investment products to consider if you have some spare money, but before you look into any of them, the first thing you should do is set up an emergency fund, if you don’t already have one.

If this crisis has taught us anything, it’s that our jobs and finances could be at risk without warning.

“Everyone should have three to six months’ worth of expenses in an easy access account for emergencies,” says Sarah Coles, personal finance analyst at Hargreaves Lansdown.

“The risk of facing an emergency is so much higher at the moment that if you don’t have a safety net in place, it should be your first and only priority.”

Laura Suter, personal finance analyst at AJ Bell, agrees. She says even £50 a month is a step in the right direction.

“With so many people facing uncertain financial futures, it’s reassuring to have a cash safety net to fall back on. By putting away little bits of money here and there, and topping it up with any lump sum savings you make – getting a refund on your season ticket, or a refund from a holiday booked for example – can mean it adds up quickly.”

Rates on easy access accounts are pretty dire at the moment – the best you can get is 1.2% from Marcus or RCI Bank – but don’t get too hung up on rates. This is your emergency fund, so you need to be able to get your hands on the money immediately.

You could also consider premium bonds as these can be cashed in quickly and there’s a chance of winning a prize of up to £1m in the monthly draw.

Pay down debt

Once your ‘rainy day’ fund is in place, you should then start paying off any unsecured debt.

Coles says: “If you have expensive debts like a credit card, this is an opportunity to pay them down. If your circumstances change during the crisis, you can freeze debt payments, but the interest will build up, so it’s far better to reduce them as much as you can with any spare cash.”

Andrew Hagger of personal finance site Moneycomms, says it would take someone who has a £3,000 balance on a credit card at 19.9% APR paying £120 each month two years and eight months to clear their debt and cost them £806 in interest.

However, if they paid an extra £50 on top each month, it would be paid off in one year and nine months and cost £522 in interest, saving them £284.

If they paid an extra £100 on top each month, the debt would be paid off in one year and four months and cost £389 in interest, saving them £417.

Hagger says: “If you consider the amount of savings in interest charges, you’d get nowhere near earning that on savings at the moment.”

You could also look into overpaying your mortgage. Most lenders allow borrowers to repay up to 10% of the loan amount each year without penalty but it’s worth checking the terms and conditions of your product as some come with Early Repayment Charges if any amount is paid off before the end of the initial fixed or tracker rate period.

Save or invest

If you have no debts and your emergency fund is in place, you could start thinking about more long-term savings and investment options.

If you want to play it safe, you could look at fixed term savings accounts, which are offering higher interest rates than easy access account products.

You could also consider regular savings accounts, which also typically pay higher rates. However, as the name suggests, these require you to save a minimum amount each month (usually £25) and often come with strict terms such as withdrawal limits.

The rates on these accounts won’t blow the lights out as savings rates have being tumbling across the board for months now.

The best regular savings rate you can get is 2.5% from Coventry Building Society (until 6 May, when the rate drops to 1.85%) or 2% from Halifax.

HSBC, First Direct and M&S Bank pay 2.75% on monthly contributions up to £250, or up to £300 for First Direct but you need to have a current account with them.

If you’re prepared to lock your money away for a while, RCI Bank is paying 1.9% on its five-year bond.

A good option if you’re saving for your first house and you’re under 40 is a Lifetime ISA where the government will top up your savings with a 25% bonus.

While the money paid into this account is free of both income and capital gains tax, you need to be aware that you’ll pay a 25% exit fee if you want to withdraw your money for anything other than buying your first home or before the age of 60.

If you already own a property, or it’s not a big priority, then you could look at adding more to your workplace pension.

Coles says: “If you pay into the pension, your employer will automatically pay into it, and if you increase payments they’ll often match the increase too. It’s worth getting as much free cash out of your employer as you can.”

Finally, you could invest the extra money, which is a riskier option but could be more profitable in the long run.

Suter says: “Lots of investment platforms let you set up regular investing from as little as £25 or £50 a month. So you could use your spare cash to top-up your investment account, or start one if you haven’t already.

“If you’re investing a small amount just be mindful that charges don’t eat up too much of your money, which means you’re probably better putting it in one fund or investment rather than spreading it around. There are lots of all-in-one funds out there that spread your money across different markets and help to diversify your pot.”

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