What's the best place for your money?

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Knowing what to do with savings can be difficult, especially with interest rates so low. Here is what you can do if you have money to invest.
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Investment ISAs put your capital at risk, and you may get back less than you originally invested.

If you’ve got spare money that you’d like to do something sensible with, knowing the best place to put it can be tricky. Should you save it, even though interest rates are low? Should you take a gamble and invest it? It all depends on your financial situation.

In this guide, we explain the different ways you can invest your money and earn a return.

Find out more about the different ways you can invest your money here.

Saving vs. investing

Before researching what to do with your savings, it's a good idea to know the difference between saving and investing.

Saving money is when you gradually put money aside over time. You might save for something you want to buy or do, like a holiday, a shopping spree or a deposit on a new home. Or you might just save so you have funds for a rainy day, such as if you need to repair your car or have your boiler fixed. Most people who save use a bank or building society to save into, and earn interest on their savings.

Investing money is when you buy things that you believe will increase in value over time. This might include buying property, or stocks or shares in a business. The idea is that you eventually sell your investments and make a profit. It’s a gamble and much riskier than saving money. You could make a lot more money if it goes well but, if it doesn’t, you could make a loss. That’s why you should never invest more than you can afford to lose.

A good way to think about it

If you don’t have much in the way of savings and you have a lot of debt, taking a gamble by investing probably isn’t right for you. But if you have a sizable nest egg and you’ve cleared most of your debts, you could ringfence a chunk of money to invest.

The importance of saving

Savings give you freedom to do what you want, as well as financial security in case something unexpected happens.

Generally, it’s a good idea to have at least three to six months’ worth of living expenses saved up. This should be in a savings account that you can access easily, so that if something happened that meant you couldn’t work, you’d have a three to six month grace period. You’d still be able to pay your mortgage or rent, buy food and so on. It’s also an emergency fund for if something goes wrong in your home.

Saving up 10% of your wages each month is good practice, if you can. 

But not everybody should save. If you have bigger priorities to focus on first, namely paying off debts, you should tend to these before you start saving. If you don’t have debts to pay, then you should definitely be saving. If you think this might be a struggle, you could use a budget planner to see where you can cut costs.

What to consider before you start saving or investing 

Before you start squirrelling money away or thinking about how to invest money, it’s important that you first clear any outstanding debt.

You’re charged more interest on most credit cards and loans than the return you get from savings accounts or investments. So a good first step would be to use any surplus funds to focus on clearing any debt.

Here’s what to do:

  • Start by listing all your outstanding debts

  • Work out which debt costs you the most

  • Pay off the debt with the highest interest charges first

Check if there are any restrictions on whether you can repay each debt early, as you could face early repayment charges and these can be high.

Should you use your savings to pay off your debts?

Short, medium and long-term goals

You might base your decision of whether to save or invest on whether your goals are short-term, medium-term or long-term.

It’s a good idea to think about your goals before you make decisions on whether to invest or save.

Four ways to use your savings

Below we’ve outlined four options for using your savings. You might want to pick one or two of these or, if you have enough surplus cash, you might want to choose a combination of all four.

1. Find the best savings account 

It’s a good idea to have at least some funds in a traditional savings account and some of this should be easily accessible so that you’re covered in an emergency. Find an account that offers the highest interest rate while giving you the access you need to your money.

If you’re happy to also lock away a lump sum for a set period, a fixed rate bond or notice savings account could offer a better return than an easy access account.

Here’s how to choose the right savings account.

2. Use your ISA allowance

If you haven’t used your ISA allowance this tax year, it’s also worth opening a Cash ISA or topping up an existing one. For the 2021/22 tax year, the annual ISA allowance is set at £20,000. 

The main benefit of an ISA is that you earn interest on your savings without paying tax on the earnings. 

Even though basic rate taxpayers can earn up to £1,000 a year in savings interest tax-free (thanks to the Personal Savings Allowance), higher rate taxpayers have a lower limit of £500, and additional rate taxpayers have no Personal Savings Allowance. So an ISA can still be a useful savings vehicle.  

Here’s more information on ISAs.

3. Use a Stocks and Shares ISA

Stocks and Shares ISAs (also called Investment ISAs) let you invest your money in a tax-efficient way. This is because your annual ISA allowance isn’t taxed, unless you receive dividends on your investment.

If you’re wondering what to do with savings, you could look into this. You can compare more Stocks and Shares ISAs here.

Or, find out more about how Stocks and Shares ISAs work.

4. Overpay your mortgage

If you’ve still got surplus savings, it might be a good idea to check whether you could use them to reduce the balance on your mortgage. Doing this could save you hundreds or even thousands of pounds in interest.

Some mortgages charge a penalty for you to overpay more than a certain amount, so check your mortgage documents or ask your mortgage provider. You might be able to pay off a certain amount without paying a penalty. Most mortgage providers, for example, will allow you to overpay up to 10% of the remaining balance per year without charging a fee.

Even if your lender does charge a fee, it may be worth comparing how much interest you’ll pay on your mortgage to the end of the term against the penalty to make a large payment.

Should you overpay on your mortgage early?

What’s the best way to invest money?

Build your retirement savings

Depending on your circumstances and existing financial plans for retirement, you could use your money to build a pension.

Many consider this the best way to invest money. Investing or saving into a pension has a number of tax benefits. Depending on your income, it could boost the value of your retirement fund by up to 50%.

Find out more about investing in a pension here.

How to invest money: Choosing an investment

Knowing the best way to invest money can be tricky. Investing isn’t a good idea in the short-term. It’s a long-term game. But if you’re happy to tie your cash up for at least five years, you could explore your investment options.

Remember that investing means your money is likely to be exposed to some risk. 

Even if you choose a low-risk investment, you’d need to be comfortable that your money could drop in value if your investments performed badly. The bigger your investment, the more money you stand to gain – but you also stand to lose more.

There are lots of different types of investments. These include:

  • Stocks and shares

  • Bonds

  • Funds

  • Property

  • Government bonds

  • Fledgling businesses 

  • And many more

Diversification is a way of splitting your money across a range of investments. It can be a good way to protect yourself in case things don’t go in your favour. By diversifying, you’ll make sure you don’t have ‘all your eggs in one basket’.

If you want to find out how to invest money, it might be a good idea to talk to a financial adviser. Professional advice can help you make educated decisions, especially if you’re new to investing.

Here’s how to find a financial adviser.

Share dealing

This investment option lets you set up your own portfolio of shares. Shares are just slices of ownership of a given company that are sold to raise capital. 

Share dealing lets you buy and sell shares in publicly listed companies using a stocks and shares account. You deal in individual companies' stocks directly.

The idea is to buy shares when their price is low and sell them on when they are worth more. The company sets the initial price, but then it is affected day by day as people buy and sell based on factors such as the company’s performance and the economy.

But there are no guarantees. Although you have more control, it can also be a much riskier investment compared to grouped investment methods. So make sure you know what you are doing before you start.

Here’s how to start investing in shares.

Asset and commodity investments

Putting in precious metals such as gold, platinum, or silver, or in antiques, art or fine wines is increasingly popular. But they’re high-risk options.

The value of these types of purchases can fluctuate quickly. This means you’re at risk of seeing your assets soar and then fall in value in a short time period.

You also don’t get a chance of an ongoing income, and some cost money to store, meaning the only way to profit is to find someone willing to pay more than you did.

Investing in property

There can be a number of advantages to this. For example, you can rent a property out to earn an income or renovate properties and sell them on for a profit.

If you don’t have the cash to buy a property outright, then you’re likely to need a buy-to-let mortgage. This would add extra costs to your property venture.

Also remember that if you rent out the property, you’re taking on the responsibilities and expenses of becoming a landlord. This could end up costing you more than you think.

There are also ways to invest in property where you pool your money with other people. Real estate investment trusts, for example, can be bought into relatively cheaply, and distribute 90% of the money they make in rents back to investors.

Find out if you have what it takes to be a property developer.

Speak to an IFA

If you’re unsure which option is the best choice for your circumstances, speak to an Independent Financial Adviser (IFA).

An IFA will look at your finances in detail. They will recommend a selection of investment options that are well-suited to your goals and circumstances.

This article is designed to offer you impartial guidance as to your options and what they might mean, but the decision on which product to take out is yours.

Maximise the value of your savings by hunting down the best rates available.