Ideas for financial goals

[Username642243]

Hello, this is a very nice problem to have but I'd not considered that it might happen (came from absolutely nothing) so I'm not sure what to do.

I've recently started back at work and we were so used to one salary that I don't know what we should do with the money for the best.
We have 150k 15 years left mortgage
Private pension dh, public sector pension me.
Potentially will inherit from elderly parents (half a house) but not guaranteed.
3.5k left after bills and living costs. Realistically 2k left after everything.
No savings (had lots of house stuff done)
Potentially looking at private schooling x2 in 6 years (although probably not).
I'm mid 30s dh early 40s. Both likely to progress a bit in careers
House is forever home, most likely needs a new kitchen in a couple of years.

Any ideas? Apologies if this is insensitive, we have always been saving, for house, kids, being sahm etc so not quite sure what to do now we're here and I don't want to be reckless.
Thanks

Overpay your mortgage every month with the max you can before a penalty.

Set up a savings account.

You probably can't afford private school for 2 kids.

I would start saving some money and over pay on your mortgage.
Obviously all dependent on which school but as an approximate private school is about 9k a year per child plus trips, uniform, other extras. So if you want to afford that you’d need to save money now.
I’m being nosy but I can’t work out how your outgoings are so low; 1500 a month for a family of 4? With a mortgage of that seems quite low.

Definitely pay off the mortgage, you'll save thousands on that much time left, even if you have to pay a penalty.

If it were me in those circumstances, I think I would do as follows:

(1) If I had any credit card debt or other high interest rate debt, then I’d want to pay it off ASAP. But only I had the self discipline not to run it up again.

(2) If I really had no savings at all, then I would put extra cash into an instant access cash ISA each month until I had enough cash reserves to last for 3-6 months if the higher earning of the two of of us were to lose their job, and also to cover the expected cost of the kitchen. There are three reasons I would use a cash ISA instead of a regular instant access account: a) the money remains accessible in case of need but gives a free option to shift, at a later date, into a stocks and shares ISA which would then be able to accumulate investment income and capital gains on a tax-free basis, b) the knowledge that any withdrawal would permanently remove the tax advantage for that money might help me to find the self-discipline not to spend it on anything unnecessary, and c) in normal times I would expect to get a slightly higher interest rate for a Cash ISA compared to an instant access account.

(3) #1 and #2 might take a good while, but if I got both of them done, then other options would start to become interesting, such as overpayments on the mortgage or a regular investment programme into stocks and shares (probably within an ISA wrapper or possibly a pension wrapper), or yet more cash accumulation if I had large upcoming expenses within 1-3 years that I did not expect to be able to to fund out of current income.

According to Dave Ramsey, in order:
Build up 3-6 months worth of expenses in emergency fund
Make sure you are putting 15% of DH salary in pension
Save for kids uni (loans don't fund everything)
Pay off mortgage

I assumed no debt other than mortgage. If so then you would pay that first.

Overpay the mortgage. If you are on a fixed term it's usually 10% you can over pay without incurring extra charges. There's a calculator on Martin Lewis' website which shows how many years you can cut the mortgage down by overpaying (mortgage overpayment calculator)

I would then suggest setting up an emergency fund

And then setting up some 'sinking funds' for things like holidays, new kitchen etc. I use my Monzo account to organise my money pots

I agree, pay off mortgage! Best thing we have done. Especially now that we are facing all this uncertainty.

(I know some people say keep it for a better credit score, we haven't had any problems getting cheap car loans etc.)

@user1493413286

I would start saving some money and over pay on your mortgage. Obviously all dependent on which school but as an approximate private school is about 9k a year per child plus trips, uniform, other extras. So if you want to afford that you’d need to save money now. I’m being nosy but I can’t work out how your outgoings are so low; 1500 a month for a family of 4? With a mortgage of that seems quite low.

Not nosey at all, sorry if not clear. Income 5.5, bills 2, but we spend an extra 1.5 somehow, holidays, clubs, house maintenance etc. My new income is 2k so that's the 'spare'

@YankeeDad

If it were me in those circumstances, I think I would do as follows:

(1) If I had any credit card debt or other high interest rate debt, then I’d want to pay it off ASAP. But only I had the self discipline not to run it up again.

(2) If I really had no savings at all, then I would put extra cash into an instant access cash ISA each month until I had enough cash reserves to last for 3-6 months if the higher earning of the two of of us were to lose their job, and also to cover the expected cost of the kitchen. There are three reasons I would use a cash ISA instead of a regular instant access account: a) the money remains accessible in case of need but gives a free option to shift, at a later date, into a stocks and shares ISA which would then be able to accumulate investment income and capital gains on a tax-free basis, b) the knowledge that any withdrawal would permanently remove the tax advantage for that money might help me to find the self-discipline not to spend it on anything unnecessary, and c) in normal times I would expect to get a slightly higher interest rate for a Cash ISA compared to an instant access account.

(3) #1 and #2 might take a good while, but if I got both of them done, then other options would start to become interesting, such as overpayments on the mortgage or a regular investment programme into stocks and shares (probably within an ISA wrapper or possibly a pension wrapper), or yet more cash accumulation if I had large upcoming expenses within 1-3 years that I did not expect to be able to to fund out of current income.

This is very helpful, thank you

@WaltzForDebbie

According to Dave Ramsey, in order: Build up 3-6 months worth of expenses in emergency fund Make sure you are putting 15% of DH salary in pension Save for kids uni (loans don't fund everything) Pay off mortgage

Yes I was wondering about pension, especially as he's due to retire before me. We will increase that thank you

I guess I was unsure whether it's better to invest /pension or pay off mortgage.
Had previously massively overpaid on our last house (upped it for our current). But wasn't sure if overpaying was the right thing, especially as we have such a low interest rate. And in all liklihood would inherit enough to pay it off (v elderly relatives).

Private school sounds ambitious as I would expect to pay a minimum of 2k a month per child.

I would concentrate on saving first before overpaying. maybe save 24k each yr for the next few yrs, saving pots for you, the dc & then new kitchen.

Personally I would put overpaying mortgage if on a low interest rate at the bottom of the list.

Are you doing AVCs in your pension? What's DHs pension contributions a month?

That sounds really sensible. I don't think we'll end up wanting private school but I don't want to completely rule it out just yet.

Do the calculations how much do you get charged for overpaying on your mortgage? Since you'll be getting very little interest on your savings it might well be worth doing this. (Do check though - my interest rate on my mortgage was 1.5% and I was able to put cash in a 3 year bond which gave me 2% and avoid the penalties for overpaying my mortgage so in my case overpaying would have been daft). When is your mortgage due to be renegotiated? Definitely pay it off faster if you can.

Because of your financial situation it's probably not worth investing huge amounts of money - you want to build up significant savings first. You probably can afford to lock some money away though in a bond. Make sure you transfer £2k a month into whatever savings account you've decided on first, don't just start spending more without thinking.

If you're going to invest in your home you could look into solar panels which will save money long term and is also obviously good for the environment and increases the value of your home.

@midscram

Are you doing AVCs in your pension? What's DHs pension contributions a month?

That's helpful re mortgage. Dh contributions just standard 5% so will definitely increase that

For DHs pension I would put the max in, what do his company put in? If it's not great then I would look at an additional pension vehicle.

On the idea of a bond, please remember that the bond interest is taxed while the mortgage interest is not tax-deductible. So owning a fixed income instrument that pays 2% has a lower after-tax return than paying down a mortgage whose interest rate is 2%. The main downside to paying down the mortgage is liquidity: If you pay down the mortgage, you cannot easily get that back as cash to be used for whatever purpose you choose, whereas you can sell the fix income instrument if you need the money for something.

On the pension idea, you get but a significant tax benefit there is also a liquidity tradeoff (less important as you approach retirement but still not trivial if you are forced to annuitise), and there is also the risk that the government will change the rules around taxation of pensions before you take the money out. However, if either of you is close to retirement age, then increasing the pension contribution would probably be a good idea, especially if the person contributing were to be a higher rate taxpayer.

Pensions do seen a long way off, at least 25 years so I don't want to go all in and potentially miss out on things when the kids are still little, especially as once they've left home we should be earning more as can both work full time.
The mortgage (maybe wrongly) doesn't feel hugely pressing as the interest rate is super low and we have 70% equity so could downsize in an emergency.

I reckon upping Dh pension contributions to beneath the tax threshold and saving the rest for a few years until we've decided about schools. Then we can either p*ss it away on school fees or pay off the mortgage completely (which sounds shocking to write down, we've always felt like we'd never have spare money)

It's better to start as early as poss with pensions.

Slightly off topic but I would except living costs to go up due to Brexit eg food & potential increases in taxes so saving whilst you have spare is a good plan.

ISAs and taxed interest are irrelevant until you have enough savings to generate £500 or £1000 of interest, depending on tax bracket, which is almost no-one currently.

Just look for the best instant access rate initially or look at premium bonds. If you get to £20k+ in PBs, the prizes should match or exceed the interest you'd get elsewhere.

Overpaying the mortgage is a consideration, but it's almost certainly not worth paying a penalty as the interest saved isn't that great any more.

If you're in a position to save 'thousands' in interest (don't forget to take interest you'd receive on savings if you didn't overpay) you'd probably be best looking for a better rate as well.

I think our mortgage rate is 2% so really low.
I have a final salary pension, and if we up DHs contributions to tax threshold that will be over 10% so I'm hoping we'll be OK. Also we could downsize in old age if needed as we're in a v desirable area.

Good point re living costs as well, we're pretty sensible but have a level of comfort that we're a bit accustomed to now!
Hoping if we can manage ourselves well we can skip the inheritance and pass it straight onto our kids for house deposits.

Yes I was surprised to hear that premium bonds are seen as a good option!