Finally debt clear and aggressively saving - what to do with the money?!

CharlesD

Hi all,

Thanks for taking the time to read and respond, I'm very grateful for all insights!

I'll give a little context to the question - sorry in advance if its too much info!

I was a young carer and from my mid teens was de facto responsible managing my parents finances, in terms of doing the online banking for them, ensuring that enough money was in the correct accounts for bills to go out, making sure they didn't overspend etc... so from a young age I've been used to managing finances.

Unsurprisingly, as an adult I like to think at least decent at handling finances. I finished Uni a couple of years ago in 2017 had around £15,000 in the bank left from my scholarship (which i saved over 3-4 years). Met my partner towards the end of Uni, after a while together found out they were £30,000 in credit card debt (at around 20-25% interest) with no money in the bank and basically staying afloat purely by just about making all the minimum repayments and living paycheck to paycheck.

Through a combination of a successful PPI claim (of around £14,000) I made for them on a postal application credit card (which went all the way to the ombudsman), my giving my partner £10,000 of my savings and a low interest bank loan I manage to clear their credit card debt around 2 years ago, and we are now debt free (i managed to get through uni without loans or the bank of mum and dad - as they could not finance me)

Since then my partner and I have 'merged' our finances and I pretty much handle all the money for us. We both earn decent money (though my contract only has 2.5 years on it left) and bring home around £2000-2200 a month each. Out of that we manage to save around £3000 a month (rent is £800), and since clearing our debt a couple of years ago, we have built up around £80,000 in savings.

So my question is what should we be doing with this?

We both contribute into workplace pensions and top up the contributions through extra salary sacrifice.
I've juggled bank accounts all my life, so now I'm comfortably managing around 10 different accounts between us trying to milk as much interest out of our savings as possible (Marcus, Nationwide FlexDirect, best interest Help to Buy's...). This makes about £130 a month in interest. I feel like its actually quite a lot of effort to get the capital to work through savings interest, and mostly isn't actually beating inflation, so it feels like at best, I'm mitigating financial damage...

I've read about various different types of investing but have no experience with it, and to be honest tend towards the type of personality that is very risk averse (a consequence of growing up in a family that never really had enough money most likely...). Every blog, article, post is plastered with very strong warnings about it being at risk and returns are not guaranteed etc...I've seen some products which even suggest upwards of 10% returns is possible but this makes me feel like some of these must be scams...

Is this something individual people / families actually do? I realise you can open up an extra pension which is also investing, but do people also invest as a substitute for savings to generate extra income? Sorry for the rant i'm just at a stage where I feel like we probably shouldn't just have £80k growing by 3k extra per month sitting in a bank account earning mostly, 1.5% but am really clueless on what to do with it...

Would really appreciate any advice, or stories on how other people who manage to save decent chunks each month manage / make the money work for them

Thanks in advance!!

LobsterMemory

My thoughts:

First thing you need to do is break down that amorphous £80000 lump of savings into smaller parts.

What are you saving for? Car, holidays, emergency fund, nest egg for the future etc
How much of the lump is allocated to each.

Then you want to look at when you need it
Car 3 years away?
Emergency fund? who knows?
Nest egg for the future 5, 10, 15 years plus

So say you want a new car in 3 years time. That means you don't need the money to be in an easy access account. So you can look at 1, 2, 3 year fixes which push the interest available to 2.2 - 2.5%
Emergency fund? How much? Well, I'm a four months salary type so that puts you in a figure of £24k. Not so stupid since you've already had that level of emergency in the past. But are you likely to need it all at once? Possibly not, so you could put away half in a 3-month notice account which can get about 1.8%.

Now for the nest egg. As you've seen if you wanted to put aside savings in a savings account, you're losing to inflation, and if you're saving for 15 years, you lose more. This is where you want to think, not of increasing income but growing capital and that's where investing comes in. It's not as daunting as you think - after all people have been doing it for a couple of centuries. If you ask what's a simple fuind for a novice, you'll get several replies.

So after you've invested the chunk of your savings destined for the nest egg into a simple fund, in future months you allocate your £3k savings into various pots and transfer to the relevant accounts based on when you want to access the cash:

easy access - as you are now
3 -12 month notice accounts
1,2 year etc fixed period
And then your investment fund


Hope that is of some interest / use

CharlesD

Thanks very much for the reply

So we do have the money broken up somewhat already:
£7500 at 5% interest in Nationwide
£7200 at 2.5% in Help to Buys
£20,000 at 1.5% in 2 regular savers
And the rest the 1.5% marcus account
Idea was to split it across our personal savings allowances so we dont get taxed.

The only goal we have on the horizon is to eventually buy a house but haven’t put a timeframe on it.

I havent put anything in fixed terms accounts because they didn’t really seem to offer that much more interest in exchange for locking the funds away.

I hadn’t thought very much about growing capital vs extra income although if the extra income is also invested wouldnt it amount to the same thing?

I saw in another thread on here that someone generates a very large extra annual income through i think ‘peer to peer’ investing?

If i were to look into investing on a practical level does it essentially work like online banking? I looked at natwests (my main current account) stocks and shares isa, but it seems to come with fees for every investment which makes me wonder how one can expect to make a profit ��

[Deleted User]

I think this YouTube series has probably been written for you individually
https://meaningfulmoney.tv/2019/04/24/introducing-season-14-new-accumulators/

(I like the presenter and follow his YouTube channel)
https://www.youtube.com/watch?v=A-n5nAzAVOY&list=PLSyXl5vQTS8UrbTXIqDvloCqkEbhrVvv7

MaxiRobriguez

Firstly, you sound like an incredibly generous person. Your efforts to clear your partners debts rather than walk away (which would have been a very easy option) is commendable. That you have managed to then get to a savings pot of £80,000 is frankly incredible. Well done. I hope you realise how well you've done for yourself and her/him.

To the nitty gritty: You're going to presumably to want to buy a house soon, so that means you need to preserve the capital to use as a deposit. That means bank accounts, not investments. So, luckily for you, you don't have to worry about learning more things at the moment, just keep doing what you're currently doing, saving c.£3k a month which can be used for a deposit. Mortgages typically come with 4.5% salary so if you're both earning say £3k a month pre-tax then the maximum house price you will be able to afford is £325k+deposit. That'll give you some guidance over what is achievable.

Finally: How are your finances "merged"? - Do you have joint bank accounts or does she simply pay her income into your bank account? If the former you need to check her credit score before mortgage applications because a serious creditcard debt like she had which wasn't managed properly might come with some red flags which impact mortgage applications. There's not much you can do in this case apart from reduce the mortgage request and/or wait a few years for the flags to drop out. If you're not joint bank accounts, then I would strongly advise that the house and mortgage goes in your name only, which you can further justify if her credit score is poor. Whilst it certainly sounds like you're getting on fine at the moment and he/she has turned a corner, you have put more financially into your relationship so if you two do go separate ways having the property in your name gives you the chance to recoup the good you've done for your partner.

Best of luck - sounds like you deserve it.

steampowered

Very high on your list of priorities should be ensuring that you are making adequate pension contributions. Pensions are an excellent and very tax efficient way of saving/investing.

If you wait until you are older to think about retirement, you could be in for a nasty shock - as by then it would be too late to do anything about it.

It is a good idea to make sure you are both putting at least 10% of gross salary into your pension - including your contributions and any employer contributions. It is best to do this through PAYE.

Excess funds beyond that should go into a stocks & shares ISA. If in doubt, simply put it into a low cost diversified investment fund and you'll do well - such as a Vanguard lifestyle fund.

You say that you are "risk adverse". However there are different types of risk. "Investment risk" is the risk of investments going up and down. "Inflation risk" is the risk of inflation eating away at your savings. If you are saving for the long term, inflation risk is a much higher risk. Nobody who invests in a diversified portfolio of stocks over a 10+ year time period loses money on it.

CharlesD

Thanks very much for the replies!

I think this YouTube series has probably been written for you individually

That podcast is great! I'm working my way through it now - thanks.

Thanks for the compliments and advice Maxi. In terms of what I mean by merging our finances, i'm referring to a point at which we decided not to differentiate our incomes - we consider all money as belonging to both of us. While our salaries still go into our own individual accounts, we do have a mixture of joint and single accounts . All our expenses and shopping comes out of joint credit cards that we pay off every month, and then everything that doesn't go on bills is put into a mix of joint/single savings accounts.

Thanks also for the tips re safeguarding against relationship hiccups - these are very important (I helped my sister out of a sticky personal / financial relationship where no such safeguards were taken...). Our situation is a bit tricky because although I suppose you could say I brought capital and financial sense to the relationship, my partner is our stable / reliable income. I'm stuck in a line of work that is likely to have me going from short term contract to short term contract unless I re-qualify. I'm just about to finish a 15month contract this autumn, and have one lined-up for 24 months after that (at £35k a year), but this has been very lucky and it is far from guaranteed that i will be able to ensure continuous uninterrupted employment.
Whereas my partner has extremely good job security at around £36k a year. So when it comes to a mortgage, the bank won't factor in my employment status I think, and will only give us a mortgage based on my partner's salary, which means they will lend us around £180,000. Also we don't want to commit to any mortgage repayments that requires both our incomes given the precarious nature of mine, at least not unless I find a permanent contract.

I checked our credit scores before we committed to this model of finance - he actually had a very good credit score (999 equifax) - presumably because despite having very high credit card debt, he was reliably able to make the minimum repayments and ultimately ended up paying off all the debt. Mine was good as well (990 equifax) but I was late entering the job market due to studies and familial caring duties so had less credit history (which is why i spend exclusively on credit cards).

With my partner having struggled with debt for many years, and my entering the labour market late, we want to go for a 20 year mortgage and figure the only way to do this and not have overly large repayments is with a very hefty deposit. At times we despair a little at how the prices are increasing and how difficult it feels to get onto the ladder in a heavily urban area in these circumstances...

I suppose we have been wondering whether putting every bit of savings into that deposit was wise though or whether we should be thinking about also growing an investment pot, but it seems like we might be best just continuing as we are currently.

Thanks again!:j

MaxiRobriguez

CharlesD wrote: »

I suppose we have been wondering whether putting every bit of savings into that deposit was wise though or whether we should be thinking about also growing an investment pot, but it seems like we might be best just continuing as we are currently.

Thanks again!:j

It sort of depends when you want to use this money really.

If you're going to use it to buy a house in the next three years then you'll want to retain the money in a savings account and not subject it to volatility risk (as that could mean when you come to want to use the money it's actually less than you started with).

If you've got longer, aka you're not planning to buy a house or the money is being planned to be used for retirement in 30 years, then you'll want to move it into investments because despite more volatility, it will grow more over time than savings - you just ignore the short term volatility because you don't withdraw the money.

You need to work out what you want to do in the next five years really and understand if there's a major capital expenditure. If there is, that's what your £80k goes towards.

Flobberchops

You've received some great responses already (which I've only skimmed, apologies), as usual the answer is ultimately a variation on "well, what do YOU want your money to do for you"- by which I mean short and long term goals, your attitude to risk, the timeframe over which you'll be saving/investing, and so on.

I think a great place to start is looking at maximising your ISA contributions. You mention (two?) HTB ISAs in existence which you're presumably paying the maximum £200 a month into each. If your house purchase date is more than a couple of years away you could actually save quicker in a pair of LISAs - a combined £8000 a year in two LISAs as opposed to £4800 a year in two HTB ISAs. You may like to keep the HTB ISAs ticking over, functioning in effect as a pair of open-ended, instant access Regular Savers.

The world of Stocks and Shares is a very big subject but I think you'd be missing out if you didn't use at least some of your annual ISA allowance to funding one, or two Stocks and Shares ISAs. Many providers offer diversified funds and incentivise regular investing with lower ongoing fees and a more modest minimum pay-in. The stock market tends, over a big enough time frame, to outperform interest on cash to a significant degree.

CharlesD wrote: »

I saw in another thread on here that someone generates a very large extra annual income through i think ‘peer to peer’ investing?

Hot - Handle with Care. I was an enthusiastic P2P investor, and indeed it's very easy to be upbeat when you're getting 12%+ on your cash. However the last 12 months or so have seen two platforms go into administration (Collateral and Lendy), and other platforms have started seeing an increase of defaults among previously performing loans (my former favourite MoneyThing for example) which has really shaken investor confidence. At this moment in time the only platform I would recommend to somebody starting out is Ablrate due to its strong track record and decent rate of return, and even then invest no more than you'd be willing to potentially lose. If the thought of losing anything makes your toes curl, then steer clear of P2P.

Just to reiterate - P2P lending is risky. You are lending your money to people and businesses who, almost by definition, have been forced to take high-interest loans because they are considered too high risk to qualify for mainstream bank lending. There is no guarantee your money will be paid back either in full or on time, or that borrowers will make full or timely interest payments. Additionally, P2P has no FSCS protection. So in addition to all your loans potentially going bad, a platform could stop trading, lose their licence, the director could blow your money on drugs and women, and you would have no automatic guaranteed claim to your money back. I mean, that's the extreme, nightmare scenario, but it's happened. Be warned!

To summarise, and echo what some others have said, you sound like a genuinely good egg and we wish you all the best in terms of financial prosperity. Do your research, make sound investment choices and you should go far.

juststuff123

Hi CharlesD

Wow and well done for a start! You're doing awesome!

Re. House Buying. What is it that's holding you back from getting on the property ladder?

Don't think that just because you work short term contracts that you can't be considered in the mortgage application process. Have a chat with a bank or two and see what their policy is. I expect you could get a bigger mortgage than you expect!

However lets you assume you can only get a mortgage for a £180,000 property and you (like me) would be terrified to part with the full accumulation of your cash so you only put down a £60,000 deposit. You only want a 20yr mortgage and lets assume a mortgage rate of 2% (I'm sure you could so better) your monthly mortgage payment would be £607 per month which is less than you're paying in rent right now so you'll still be able to save your £3000 each month and You'll be putting money towards an asset that belongs to you rather than your landlord. And again if you're super risk averse and don't want to put everything into S&S ISa's etc, overpay the mortgage at a level you're comfortable with and you'll reduce the interest you pay back too.

Anyway good luck with whatever you decide, you guys are in a great position to set yourself up for the future.

CharlesD

Thanks for all the information and encouragement everyone, what a great community!

Very high on your list of priorities should be ensuring that you are making adequate pension contributions. Pensions are an excellent and very tax efficient way of saving/investing.

Many thanks for pointing this out Steampowered, I've actually sent a query to my employers pension services to ask about this as a result. When i started work I immediately increased my pension contributions above the standard by an extra 1% (which is matched by my employer for a 2% extra in total - although this match has since stopped sadly).

I think i have a strange workplace pension - its based off my salary, so my pension pot doesn't actually increase based on my standard contributions (which are 9% of my gross salary - and 18% extra from the employer). With a salary of £33,200 my pension pot only increases by £442 a year (despite monthly payments of £221). Don't really understand it so have fired off that question. The extra 1% i contribute is standard investment I think and constitutes a second pot within the same scheme.

Based on all the advice, I'm probably not going to invest any of the savings we have accumulated since we would like to get on the property ladder as soon as we can. However moving forward I'm probably going to increase my knowledge and look into splitting the £3000 monthly savings into a variety of different products (though probably going to avoid P2P lending).

Are we able to put into both a stocks and shares ISA and our help to buy ISAs in the same year so long as we don't exceed the £20,000 yearly allowance? Same goes for the LISA which was suggested, can we add into LISA's and a S&S ISA? From Flobberchop's comment I can see that we probably are wasting our ISA allowance, which I had intentionally dismissed because ISA interest rates generally haven't been great since the recession. At the moment you are right, we max out £200 monthly into 2 Help to Buy's, but don't touch the rest of our ISA allowance.

After reading everyone's comments and listening to the excellent podcast recommended earlier in the thread, i seem to have a different approach because we don't determine how much to save based on goals as we tend to just save every penny after essential expenses anyway. We don't have any dependents, don't plan to have children or buy cars etc... so our desire stems pretty much from just ensuring that we are financially comfortable later in life and hopefully can retire a little earlier.

In terms of what's holding us back from buying a property, its purely the price and my employment situation. When we asked the bank what the numbers might look like last year (natwest), the monthly repayments were around £800 - similar to our rent, and max £180,000 based purely on my partners salary. And to be honest £180,000 where we live would be a noticeable drop in living standards compared to what we rent for the same money. So the only way for us to go beyond that is by bringing more capital. That was a year ago though, might be worth going back to them and seeing what those figures look like in our current situation.

Thanks again everyone! A lot of information to digest and all very helpful!