I’ve talked on some of my previous podcasts about the negative impacts that coronavirus and lockdown have had on our personal finances. But the last few months may have actually had a positive impact and you may have been in a position where you’ve actually got some additional savings in place.
Today I wanted to cover how you can make the most of your money. Whether it’s because maybe you’ve not spent as much as you normally would, or it might be because you’ve not had any of those big summer holidays or those special city breaks have been cancelled.
I know for some of you, the idea of shopping on the high street has lost its appeal. Lots of people are spending more online or just not spending as much at all. It’s been a good opportunity to reflect on our spending habits. At the start of the first lockdown, lots of you were encouraged to work from home where possible. For us it was not too much of a change because I’ve been working from home now for about four years, and my husband also spends a 70/30 split between the office and home anyway.
I know that if someone had said to you on the 1st of January 2020, “Oh by the way, you’re going to spend most of the year living and working from home” I’m not sure many of us would have welcomed in 2020 as confidently as we did!
But a lot of workers have been saving money by not having to pay for daily commutes or not having to fill up the car with petrol. Obviously there have been challenges for some of us with home-schooling and trying to balance that juggle between working and having the children at home.
For many people that may have meant that you perhaps had a review of your situation. I know a few of my clients stopped sending their children to nursery and that saved some considerable school costs, nursery fees and also school fees.
But if you cut your spending and saved a few pounds, what are you planning to do with that money? That’s what I want to talk about today.
Make the Most of Your Money
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- Save it
- Pay off some debts
- Put some money into your pension
- Think about starting or adding to your emergency funds – your financial foundations fund
- Look at some other investment opportunities
- Start something new!
Have you been:
- Using it to top up your financial foundation pots or your emergency funds?
- Been spending it on something special or a bit of a treat? I’ve been speaking to quite a few people that have had home renovation projects and things going on.
- Perhaps you’ve put it towards something you’ve always wanted but didn’t feel like you had enough to do so, like perhaps a new car or some work on your house.
Today I’m going to be looking at some of the things that it’s worth considering if you are fortunate enough to have saved a little bit of extra money.
How many people have actually been saving?
We have become a bit of a nation of accidental savers! People have been saving more of their disposable income (that’s the money that’s left after you’ve paid your bills) more than they have in the last 30 years.
According to the Office for National Statistics or the ONS, on average as a nation, we’ve saved almost 30% of our disposable income between April and June of this year. That’s almost £3 in every £10. The ONS have also said that household spending has fallen by almost 24% over the same period, mostly because we couldn’t get out and spend our money.
The Bank of England have said that the saving came to a total of £54.6 billion between April and June, which is on average £18 billion a month! Just as a comparison, this is compared to an average £5 billion a month before the pandemic. From £5 billion to £18 billion. Quite a big shift!
People are also paying off their debts. People have paid off £7 billion worth of debts from their credit cards from April to June and another £4.8 billion on other loans. So we have become a bit of a nation of accidental savers.
What do you do if you have extra money?
1. Save it.
I want to share with you an analogy that I call the fridge-freezer-larder. It’s something that I’ve used for years and years, even when I worked at the bank, I used to use this analogy. It’s very simply;
- Are you saving for something that you need instant access to i.e. things that go in your fridge, like your eggs and your vegetables and your milk. Things that you would probably use every single day.
- Are you saving towards something that you might need occasional access to, maybe like your tins of beans or your herbs and spices in the larder or your cupboards.
- Or are you saving for your future self? This is like your freezer. This is money where you don’t necessarily need to have instant access daily access. You might even not need access for the foreseeable future.
I just want to touch upon this. I sat down last night with my laptop thinking. We are considering sending the kids to a little private school around the corner and a few years time. We’re not decided on it yet, but we just wanted to get into the habit of saving and putting that money aside now so that we could see how that would affect our lifestyle and just our savings habits. I think it’s a really good idea to start getting into the habit before it actually happens.
I was looking at my account last night thinking, I’ve got a few months worth of school fees saved there, and I didn’t want to keep it in the account that it’s in. I was thinking of the fridge-freezer-larder approach.
- Do I need instant access to it? No.
- Do I need to have occasional access? No, not really.
- Do I need to have access in the future? Yes.
I’m thinking probably five to eight years away because we’ve got enough money in other savings accounts to pay for their first few years if we wanted to.
So I was thinking, okay so where can I put that? I came up with a decision that I would put some of it in investments and some of it into my larder pots. This could be things like fixed term bonds, regular saver accounts, things that you don’t necessarily need to have instant access to. Instant access are things like your bank account or an instant access savings account, things that you can access daily.
It’s always worth just checking the terms of conditions of these accounts because some accounts you have to give notice on if you want to access them, particularly if they are the occasional access accounts. If you’re going to be stockpiling your investment pots or your freezers (click for jargon busting!), then there’s lots of things to consider from an investment perspective.
So fridge-freezer-larder. Do you need instant access, occasional access or is this money for your future self? And when you’re considering the future self pot i.e. investments, the one thing I just want to say is the biggest thing to think about with investments is risk.
If you think about the different risks associated with instant access accounts, occasional access accounts and investments, there are different types of risks, but the main difference is that with cash, the biggest risk you’ve got there is inflation risk i.e. the cost of living going up every single year and your money not keeping up with that pace of inflation. That’s the biggest risk you have with cash, but you don’t have what we call capital risk, which is where your money can physically go down in value.
If you’ve got £10,000 in cash, you’ll have £10,000 in there plus interest. We also have the compensation scheme, which protects your cash up to £85,000 per person, per institution, as long as they’re regulated and registered.
With investing, obviously there is a volatility risk, which is where the performance is no guarantee what return you will make from that investment. There’s different ways that you can look at reducing risk with investments, but it is a whole different subject.
2. Pay off some of your debts
You might be sitting there thinking, okay, what do I do first? Do I pay off some of my debts or do I save?
Which do I pay off first?
Generally speaking, the first thing I would do is just do a helicopter view. Grab a of paper and do a helicopter view on what debts you have. List out your credit cards, any loans, your mortgages, for example. I would, first of all, have a look at what’s the outstanding balance and what’s the interest rate that you’re paying.
Then it’d be a case of looking at which one do you pay your first? There will be different strategies, and pros and cons around this, but one approach is you could look at paying off the most expensive one first i.e. the one that you’re paying the most interest on and get that one paid off as quickly as possible, and then move on to the next one and then move on to the next one and then move on to the next one.
The alternative strategy is that you pay off the smallest balance first. This is what’s called snowballing. Let’s say you’ve got three credit cards, different interest rates with three different balances. You pay the balance of the credit card that has the smallest balance. Let’s say you had one at £1,000, one at £2000 and one at £3000. You’d pay the £1000 balance off first.
The idea behind that is it builds momentum. It builds pace and motivation to then get that cleared and then you’d pay off the £2000 card and then you pay off the £3000 card.
Those are two different scenarios that you could look at. You either tackle the smallest step first and work your way up, or you focus on paying the card that has the most amount of interest on first.
One of the things I think is important to mention here as well, is the impact on your mindset. There’s quite a difference, I think, between those two options and it really depends on what your relationship with money is. For me, when I was in that situation, I wanted to get at least one paid off as quickly as possible. So when I did that helicopter view, I also included my overdraft at the time because I was in my overdraft every month. Then I thought, right, what’s going to get me the biggest momentum as quickly as possible.
I focused on building that momentum and paying off the smallest debts first. There’s pros and cons of both of those strategies. But if you do that helicopter view, you can then think, okay, which is going to work best for me.
What else could you do with that extra money?
You could pay off some of your mortgage. Now we did a deep dive workshop on this subject in The Money Circle with our Associate Coach who is an Independent Mortgage Broker. There’s lots of ins and outs and pros and cons of this strategy. So if this is something that you want to get a deeper dive into looking at, do you pay more off your mortgage, then come over and join us in The Money Circle.
Smaller overpayments are huge. The power of compound interest and making overpayments on a mortgage is really quite significant. Even if you were to pay a small amount of money off every month, it can have a big impact on how quickly you can actually get that mortgage debt cleared earlier.
Simon Rhodes who’s one of our Associate Coaches shared recently that if you take a £200,000 mortgage with a mortgage term of 35 years, the interest rate on that mortgage is two and a half percent, and your monthly repayments ordinarily are £714.99 per month. If you made an overpayment of £344.82 per month (maybe you’re saving on nursery fees or you haven’t done that holiday this year), and you redirected that money towards overpaying on your mortgage, that would actually save 15 years off the term of that 35 year mortgage. That’s massive.
Obviously that’s considering that you’re making that overpayment every month. You might be thinking, well, I can only do it for a few months, obviously that will impact on the figures. But what a tremendous saving to be able to take 15 years off a 35 year term mortgage by making an overpayment of £344.82.
It may be that you’ve just got £50 a month or £100 a month. Maybe you’re not spending on your gym membership, for example, and you just redirect that money off of your mortgage. It can be quite substantial, particularly when you take into account the effect of compounding.
That’s just an example to show you the power of what could happen if you were to look to pay that mortgage off early. One thing just to mention from overpayments on mortgages is that some lenders, depending on what mortgage deal you have – you might have fixed rate deals or discounted deals where you’re in that deal for a number of years, typically 2-10 years and variations in between. Often you can pay up to 10% off your mortgage capital with no penalties, but sometimes there are different restrictions on overpayments.
It’s always worth just picking up the phone or speaking to your lender, or just having a look at your terms and conditions to make sure that you’re not going to get penalized for any overpayments.
3. Put some money into your pension
I did a really deep dive on this recently, so this might be something for you to consider.
4. Think about starting or adding to your emergency funds – your financial foundations fund
Always give it a name that means something to you. Give it purpose, give it meaning, and give every pound a purpose. If you don’t have that right now, maybe that’s something that you could think about doing.
Generally speaking, it’s always good to have between three months and six months worth of your expenses tucked away in your fridge or larger pot, if you go back to that analogy. It’s really important to think about creating strong financial foundations.
From a mindset perspective, it’s such a game changer. If you don’t have one right now, believe me when you get there, you’ll feel so good about it. Even if you don’t get the three to six months, just getting started feels incredible. It’s the small steps, big wins that make a big, big difference.
I’ve had people message me recently saying that this is the first time that they’ve had money for Christmas, that they’ve actually got money set aside with that purpose for Christmas gifts and they’ve never had that before. They’ve done that because they’ve been listening to the podcast or they’ve done one of my challenges or Facebook challenges. It’s just something that they’ve never really thought about doing before.
5. Look at some other investment opportunities
That could mean investing in some personal development. Maybe you want to go and work with a coach or a mentor. Maybe you want to use that money to invest into your business. Maybe you want to get your YouTube channel up and running and you want to invest it in working with someone that can help you to do that.
Are there any other investment opportunities that you want to consider? That might mean even thinking about other investment strategies like buying property, for example.
What happens if you want spend some of that money?
From some of the conversations that we’ve had recently, this is where I think it’s a good time of the year to be doing a recce on your financial values and your needs versus wants.
We’ve done this recently thinking about wanting to do the kitchen. We’d also like to build like a little outbuilding in the garden, and I want to do a few other little things in the house. We’ve put them onto a list now of what we would like. So they’re sitting on our wants list, not our needs list.
We don’t need a new kitchen. We don’t need an outbuilding in the garden. We’d like to have it, but it’s not a need. We do the same with the children. If the kids are like, “I want an X-Box, I want a Playstation” we always say to them, is it a need or is it a want?
I always ask them to go and add it to their list. It just gets them thinking about, if we do want to spend our money on these things, are they a want or are they a need?
It helps you to put it on the list, leave it there, leave it there for a few days or a few weeks. Sometimes I come back to my list and think, I did want that, but I don’t want to anymore because I’ve found something else I want to use that money for instead. It’s giving every pound a purpose, bring it back to that all of the time.
6. Starting Something New
The other thing you could do is use this as an opportunity to think about starting something new, maybe a new business or a side hustle. We have several resources on passive income which you can search below, including Generating Semi-Passive Income Streams For Entrepreneurs.
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Let me just pick out two or three examples to share with you:
- The first thing that you could do is to think about what are your skills and expertise and how could you create an online course that could add that value to the world with those expertise, those skills. We have historically used platforms like Thinkific and Teachable. You can look at platforms like Udemy, and you can basically create audio content, some video content, you could create workbooks, and put them together into an online course that helps people against one of their pain points.
Maybe you’re a guitar teacher and you could put an online course together to show people how to learn how to play guitar like five minutes a day!
Maybe you’re a photographer and you could teach children how to use a camera to get good photos when they’re in lockdown, for example, and you could put a mini course together.
Maybe you could set up a YouTube channel.
Maybe you want to get started with sharing your content and your videos and your expertise to the world. Content is an asset. Anything that you produce can become an asset for a future business.
- Maybe you want to take this opportunity to invest in writing a book and you could use some of the extra money that you’ve been saving to work with a team of people that can help you to edit your book, a copywriter or a ghost writer.
- Or maybe you could start to have a look at launching a podcast. You could do that over the Christmas period. You can get yourself a little mic from Amazon or somewhere else.
Lots and lots of different ideas as to how you could use that extra money to invest back in yourself, in your business, in your passion, and your skills. Overpaying on different things, saving it for different purposes.
But remember that golden rule give every pound a purpose. And when you’re thinking about giving it a purpose, think about, is it going to go into my fridge, my larder, my cupboards, or my freezer.
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