What should I do with disposable income on my budget?

Jimmy9012

Hi folks,
I am 33 and have £1,900 disposable income every month after mortgage, car payment, food, bills, travel and other entertainment/needs/fun have been paid. What should I be doing with it?

Currently considering overpayments on the mortgage and can overpay by 10% per year, but are there any better alternatives? I have £250k left to pay on the mortgage at 3.79% and that is fixed interest for 5 years (4 years left until that period ends).

I have a HSBC loan with £12,476 left to pay which was taken out to cover the costs of a car, with 46 payments of £271 remaining. I am not sure the interest rate, but £12,476 is the total including the interest left to pay. The rate was better than finance via the dealership which was 9%, which is why I went to HSBC and I think the interest was around 3% - 5%. I would need to contact HSBC to confirm this rate.

Would it be better to overpay the mortgage, pay off the HSBC loan quicker, or opening a savings account of some form and storing the money in that? I do not currently have any savings.

Cheers,
Jim

Shakin_Steve

You should always have a savings cushion for emergencies, and I must say I'm surprised you haven't got one already. I'm also surprised that you had to take out a loan for a car. What have you been doing with your £1,900 each month?
Anyhow, you should start now getting a contingency in place. After that, throw as much as you can at the loan bearing the highest interest. If you reach the 10% threshold on your mortgage, start on the loan, if they allow overpayments without penalty.

Jimmy9012

Shakin_Steve said:

You should always have a savings cushion for emergencies, and I must say I'm surprised you haven't got one already. I'm also surprised that you had to take out a loan for a car. What have you been doing with your £1,900 each month?
Anyhow, you should start now getting a contingency in place. After that, throw as much as you can at the loan bearing the highest interest. If you reach the 10% threshold on your mortgage, start on the loan, if they allow overpayments without penalty.

Hi Shakin_Steve,
I purchased a house and all my savings went on that for the deposit, solicitor fees, searches and stuff like that. Since then I have been getting furnishings like new sofas, beds, TVs, carpets and stuff like that, I am only just now at a point where the £1,900 per month isn't set to go on anything. Until now for the first year of owning this house, I have had things to spend the £1,900 on like getting a nice new shed, gardening equipment, cooker etc... the list just went on and on. Now though, nothing left to buy so want to know what I should be doing with it...

So, I think the loan with the highest interest is actually the car, then the mortgage. I don't have any other loans. Getting a contingency makes sense, then car, then mortgage... what would you suggest for a contingency? 3 months salary?

Sea_Shell

What pension provision do you have so far?    Are you currently making contributions?

Jimmy9012

Sea_Shell said:

What pension provision do you have so far?    Are you currently making contributions?

Yes. I am part of my employers pension scheme with Scottish Widows. So far it has around 7k in the pot, which is a mix of my own contribution from PAYE and the employer contribution. I do not have any other provision. The £1,900 disposable includes this pension scheme having already been paid. 

El_Torro

First get yourself an emergency fund (3-6 months outgoings to pay for any unexpected expenditures, like house repairs, losing your job, etc..)

Once you have done this then I would say you need to either pay off your car loan, reduce your mortgage, pay into a pension, or pay into a Stocks & Shares ISA. Perhaps a combination of all these things would be good. Especially if you currently have no pension you need to be looking at starting one up. I assume you don't want to work forever.

Investing will generally give you a much better return than paying off your mortgage. You need to invest correctly though, otherwise you might do something silly like sell all your investments when the markets crash (the worst possible time to sell).

Mickey666

Jimmy9012 said:

Sea_Shell said:

What pension provision do you have so far?    Are you currently making contributions?

Yes. I am part of my employers pension scheme with Scottish Widows. So far it has around 7k in the pot, which is a mix of my own contribution from PAYE and the employer contribution. I do not have any other provision. The £1,900 disposable includes this pension scheme having already been paid. 

£7k at 33 doesn’t sound very much to me.  With £1900 available each month after all other expenditure, and assuming an ‘emergency fund’ of around £10k, I’d probably share the money between pension and mortgage.  It wouldn’t need to be every month if you suddenly needed a big purchase.  I concur with the above surprise about having a car loan with this amount of spare cash every month, unless you have something ridiculous like a Ferrari etc.

Jimmy9012

Mickey666 said:

Jimmy9012 said:

Sea_Shell said:

What pension provision do you have so far?    Are you currently making contributions?

Yes. I am part of my employers pension scheme with Scottish Widows. So far it has around 7k in the pot, which is a mix of my own contribution from PAYE and the employer contribution. I do not have any other provision. The £1,900 disposable includes this pension scheme having already been paid. 

£7k at 33 doesn’t sound very much to me.  With £1900 available each month after all other expenditure, and assuming an ‘emergency fund’ of around £10k, I’d probably share the money between pension and mortgage.  It wouldn’t need to be every month if you suddenly needed a big purchase.  I concur with the above surprise about having a car loan with this amount of spare cash every month, unless you have something ridiculous like a Ferrari etc.

I agree, its not a lot... yet. I only signed up to the scheme a year or so ago. My focus was saving a deposit for the house to get away from renting as that was expensive and owning was my goal. Saving £200/£300 in to a pension each month seemed illogical to me when paying £1,200 to a landlord and paying his mortgage for him per month instead of buying my own house brick by brick. So, I put that £200/£300 in to the pot each month for my deposit so I could get away from dropping £1,200 every month to somebody else. Why save £200/£300 per month and extend the length of time I am giving £1,200 per month to a landlord? Maybe I am wrong, but in my mind that makes no sense to do...

After buying the house I had £0 spare for a car and needed one for a range of reasons. That is why I got a loan to buy a car rather than buying outright. I was putting my monthly income in to furnishing the house as I needed, so did not have capacity to buy a car outright. Simply, I had no choice as the car was necessary.

I think saving an emergency fund makes sense and paying the car off first. So, will do that, then start making overpayment to the mortgage. The £1,900 disposable is after the car payment, and is still as I understand a very healthy amount per month spare...

This makes sense then, each month put £950 in to an account as an emergency, and pay £950 on to the car loan to get it paid off within about 10 months. By the 10 month mark I would have £9,500 in an emergency fund and the car would be pretty much paid off...

theoretica

Things to think about - paying yourself back the pension contributions you didn't make while saving for the house.  Saving for your next car - how long do you expect this one to last and how much might a replacement cost?

Jimmy9012

theoretica said:

Things to think about - paying yourself back the pension contributions you didn't make while saving for the house.  Saving for your next car - how long do you expect this one to last and how much might a replacement cost?

I will do so for the next car for sure
I totally understand that some money would have been lost by not paying in to the pension sooner. Specifically, the employer contribution, the tax benefits from the government and any interest from Scottish Widows investing, but, that was still far lower than the money lost paying to a landlord. I looked at the numbers carefully when making the decision to not join the scheme earlier. Now I have a house I have, it now makes sense. But losing 1,200 to a landlord each month does not make sense to save 200/300, even with the benefits listed. Sure, if the employer match and the government tax benefits came to £1,201 per month in to the pension then it would make sense, but the numbers are way off...

The car is a 2016 top of the line Kia Sportage with 40k miles. I would expect this to last me until around the 200k miles mark. 

Jimmy9012

One other thing I was thinking of was to save up 50k then use that to get a buy-to-let mortgage and rent a house. Would that be foolish given the current economy?