What to do with Spare Money

mb6960

Hey,

Looking for some advice. 

I currently have around £2000 spare each month from my monthly wage after all expenses have been paid.

Currently I usually save about half of that (although this varies ) and usually waste the rest on unnecessary purchases. I feel like I am wasting money and plan to become more frugal with my money, but ultimately I want to make my spare money work harder over the long term and build up wealth.

My current savings account rate is 1.5% and currently have enough to cover me for about three months of expenses.

I have no short term debt (Car is a lease)

My mortgage on my home is fairly new but I have about 200k profit if I was to sell and pay off mortgage.

Should I Invest in stocks and shares, Keeping saving into my saving account or a mixture of both. I have no interest in making withdraws from whatever option (unless in an absolute emergency).  Is there a good ratio?

I have been looking at ETFs as I recently consolidated all my pensions and they are making good returns against the ETFs I have my pension invested in.

Appreciate any advice and understand limitations of financial advice  

Thanks

M

tacpot12

I would suggest that you need to both save and invest, i.e. a mixture. There is no widely accepted "good" ratio as it varies so much depending on individual circumstances. 

In your situation, I would suggest that you should be saving about half the spare money, until you have about six months of living expenses in cash savings. Once you have this amount, you can reduce the amount of cash savings substantially, and switch to investing most of it. If you take this approach you would be investing partly to give you the  option of cashing in some of the investment in years when they seem to be doing very well to pay off your mortage. 

An alternative approach would be to (one you have your six months of living expenses), save half the money and invest half, and then use the savings to make an overpayment of the mortgage each year. This alternative approach is slightly less risky. Either way, you end up with your mortgage being paid off early, and will save some mortgage interest as a result. Some people say that its not worth paying off the mortgage early for financial reasons, but there are other reasons to do so. I took enormous comfort from paying of my mortgage early because from that  point onwards I knew I could never lose my home, whatever else happened in my life.

I would strongly recommend that you look at income protection insurance if you don't already have this. I would not rely on anything that you work provides you with. You need your own, portable, insurance. Such insurance need not cost very much if you only ask to be paid what you need to live rather than what you currently earn (You started the thread by effectively saying that you earn more than you need to live    ), and if you defer the payments for 12 months. Having six months of living expenses saved will usually mean that you can wait for 12 months for the income protection insurnace to start paying out, as you will be entitled to Statutory Sick Pay for six months, and  your  employer will probably also pay you some additional sick pay.

Investing in stocks and shares via a collective investment fund (like an EFT, Unit Trust Fund or Investment Trust) is a good way to spread the risk. You should invest using a Stocks and Shares ISA so that you are not taxed on the growth that your investments will hopefully deliver. If you were to save £333 a month into a cash savings account (not an ISA) and £1,666 into a Stocks and Shares ISA you would be maxing out your ISA limit each year. You are allowed to earn a certain amount of interest on cash savings each year without paying any tax, but the amount you can earn tax-free depends on whether you are a higher rate or additional rate tax payer. Details of this personal savings allowance are here: Tax on savings interest: How much tax you pay - GOV.UK (www.gov.uk) 

Albermarle

You could add more to your pension. It is tax efficient but it depends on your objectives for the spare money you have .

Linton

Consider increasing your pension contributions to enable you to retire earlier.

mb6960

Linton said:

Consider increasing your pension contributions to enable you to retire earlier.

I am not the best when it comes to pensions, but is it even possible to cash out your pension early? I always assumed in was 67 (or whatever the retirement age will be in 30 years) 

My pension does very well at the minute thanks to a 14% contribution from my employer 

eskbanker

mb6960 said:

Linton said:

Consider increasing your pension contributions to enable you to retire earlier.

I am not the best when it comes to pensions, but is it even possible to cash out your pension early? I always assumed in was 67 (or whatever the retirement age will be in 30 years) 

My pension does very well at the minute thanks to a 14% contribution from my employer 

The state pension age may well be 67 by the time you get there, but private pensions are (currently) accessible from 55 - workplace pensions may have more restrictive conditions though, so you'd need to check the rules for your scheme....

Albermarle

mb6960 said:

Linton said:

Consider increasing your pension contributions to enable you to retire earlier.

I am not the best when it comes to pensions, but is it even possible to cash out your pension early? I always assumed in was 67 (or whatever the retirement age will be in 30 years) 

My pension does very well at the minute thanks to a 14% contribution from my employer 

As above, a standard DC scheme can currently be accessed at 55 ( increasing soon to 57). There is no link between when you actually retire, or when you get the state pension. If it is DB/final salary type scheme ( more prevalent in the public sector nowadays) then you might have to wait a bit longer, but unlikely to be 67. In any case normally you do not 'cash out' a pension as such. You decide on a retirement income plan suitable for the pension you have, and your personal circumstances at the time.
14% is very much on the high side so a good employer !
To get more up to speed on pensions this forum can be useful as can this govt site.
Pensions and retirement | Help with pensions and retirement | MoneyHelper