Pay money into savings, pension or mortgage?

[Dualipa]

I have a spare £100 a month and wondering if I'm best to pay into a savings account for a rainy day, pay into a pension or pay it off my mortgage?

Any advice please?

Do you have an emergency fund (usually 3 - 6 months worth of outgoings?) If not start with building that up :)

Order of preference in my view is:

1. Emergency fund / rainy day fund - get this up to what you consider is an acceptable amount for you. That is typically 3-6 months of expenses but could be higher if you have a job that is unstable.

1. Pension if fund selection is reasonable and you are not already doing around 15% of your salary. It may though depend on how soon you retire, as if within a few years then having a paid off home may be better.

1. Mortgage.

If you have any debt (other than your mortgage) pay that first...then save a 3-6 month emergency fund. If you have a workplace pension pay whatever is needed to make sure you max out employer contribution.

If that's all in hand then I'd split any excess income between mortgage and pension...bear in mind any fees or limits on mortgage overpayments.

At the moment I'd factor the security of your job/income and the worsening recession

Just for now I'd save ready cash, on the premise that if you lose all or part of your income you'll need it to bridge the gap, but if in the long run you don't need it for that you can then use it for pension or mortgage.

When you say 'spare £100' is that before or after annual and irregular expenses like insurance, car repairs/MOT, Christmas, white goods replacement etc etc?

If not, just save it until you have a decent pot, plus consider the job loss/serious illness scenario.

No point locking all your spare money away in a pension if you don't have any money to deal with an emergency that could happen now.

Whether or not the next step would be a pension would depend on things like your existing pension arrangements and your mortgage rate. But bear in mind that the interest rate on many mortgages is so low that there's little point rushing to pay it off, unless you already have good pension arrangments.

However, if you aren't sorted for a pension, that should probably be your focus, especially if you are young, as the stock market is currently quite low, and there would be a long time to get past the inevitable corona related uncertainty so growth should be decent over time. Plus you get tax relief on contributions.

I've started to pay £100 a month into premium bonds.

@boulevardofbrokendreams82 everyone to their own but I’d seriously relook at premium bonds. Martin Lewis has a very poor view of them. There’s much better ways to use £100 a month.

I've got my emergency fund money saved in premium bonds. It wouldn't be earning interest anyway, and it's easy access.

Sorry, 'much interest'.

Now that it's hard to get decent interest from other cash savings, I don't think premium bonds are so bad. We should all aim to have some spare cash saved, that you can access quickly without penalty or risk, so they're probably as good a place as any and certainly no worse than many savings accounts paying virtually no interest.

Yes, if you 'only' have a few thousand or below, chances are that you'll win little or nothing, but the average payout rate is 1.4%, which is higher than any other instant access savings account. The closer you are to the maximum of £50k, the more likely you are to get close to this rate, so the risk is quite low, and you can get your money back in a few days.

You're effectively gambling the interest you would definitely receive on your savings account, so it's up to the individual how they feel about taking that risk.

Say you have £10k of savings. The best instant access savings account pays 1.2%, so you'll get £120 per year in interest.

You'd have to get 5 x £25 PB prizes in a year to beat this rate, but typically, you'd probably get 2 or 3 prizes per year, so an effective interest rate of 0.5-0.75%, so less, but better than a lot of savings accounts out there. Plus there's a small chance you'll win big, and a reasonable chance you'll beat the best savings account.

I have built up £14k PBs over the last year. In 2019, my prizes equated to an interest rate of 2.1% so better than instant access savings. This year, I've only had 1 £25 prize so far, so obviously losing out on a bit of interest, but there's still the rest of the year to go.

Sorry meant to mention that another thing the OP could look into would be a regular savings account. I don't know what is currently available but I have two running that pay 2.75% but these were taken out before the latest interest rate drops. If you're looking to save out of income, rather than move a lump sum, and are happy to tie the money up for up to a year, they're one of the best paying accounts.

I'd go with pay debts (if any first) then save up a 'cushion' or 'emergency fund' in an easy access account.

I'd then start saving into an account it is harder to get at and anually move a chunck into a pension scheme. You employers if you have one, if not look at what is available.

Obviously you could pay 1/3 into each.

I would say it depends on where you are in life, age, current debt, current mortgage current pension pot etc.
I used to be so bad with money, 16 years ago i owed over £40k on credit cards, plus a mortgage & young kids etc. Had a light bulb moment and went on DMP, paid my debt off in 8 years.
For six years after that I enjoyed life a bit more until 2018 when I had the spare money and motivation to over pay the mortgage and paid off £25k in 14 months. Mortgage paid at 52 (yes I am being smug). You could argue it would have been better to pay it into a pension, but there is something nice about owning your own place and now we have the covid issue even if I get made redundant I can survive on UC, the house is mine, cant get repossessed! For me at the time it was better to pay the mortgage off.

Pension wise I've been lucky, have a couple of final salary pensions (15 years service) and a defined benefit one where I pay in 4% and company 12% so am hoping that will be ok. Just to give you an idea I worked somewhere for 4 years with no pension so saved £100 in a private pension for 4 years, this was 20 years ago, but recently I transferred it and it had a value of £34k, I thought this was quite good

If I was 35 with a £250k mortgage I'd put it into a pension as £100 over-payment on mortgage is probably not the best use of the cash, it just feels like a drop in the ocean.
Anyway thats just my experience, but as I said it all depends on your circumstances.

Oh and I never had an emergency fund...........I live life on the edge!!!!

How much is left on your mortgage OP? I only discovered that over paying was a thing! I only manage £100 over, no other money to spare but I love the idea of chipping away at it. Being mortgage free by 50 would be amazing, would take the pressure off so much.

Why do so many people post on the Money section and not come back?

@Dualipa. Can you post an update?

Sorry!

I'm going to follow pp advice and save until I've got 3 months worth of salary, then possibly pay 1/2 to mortgage & 1/2 to pension.

My savings & isa are with Lloyd's and have 0.20 interest rate. It's terrible!

People who are saying about an emergency fund... Do you ever spend from that or is it just sitting there? I have never even thought about having that.

Emergency fund is for unexpected expenses. A plumbing emergency for example. It is not for general car maintenance as that is an expected cost but it is for a flat tyre situation as that is not expected if tyres are replaced on a reasonable schedule.

So you do not spend money from the emergency fund, unless it is an emergency. It is a financial buffer to stop you taking out debt.

Emergency fund is for big ticket items that are unexpected - new boiler or my big fear - being made redundant.

Its worth remembering that you get tax-relief on pension contributions (there is a limit - currently up to £40,000 I think) so £100 paid into your pension is the equivalent of around £120 (or £140 if you are an higher tax payer).

I am only just starting on mine really - I have been a bit lax in the past but this has made me realise stuff can come out of the blue.

I have regular savings for annual expenses. So for a car for example I add up cost of service, insurance, breakdown and then add a few hundred on top for stuff like tyres, other small bits. Same with my cats. I used to pay insurance but it got really high so I now put that money away every month in savings to act as a pot for vet costs.

Then I have a number of things I am saving for in my big savings pot. One is 3 months bills - it would probably be more like 5 if you took the assumption I could get mortgage holiday in worst case scenario. Then my other pots are for a holiday and flat roof replacement which I know will come in several years. Also a new car.

Not sure I have any hope of ever getting as far as the new car pot though!

I am far more structured and budget way better now though than with my ex who just spent so hopefully I may get there!

Aah, OK, so I would say I do have that. I put aside money every month which I could use for an unexpected expense e.g a boiler but would also use for longer term saving e.g a home project / car - I just keep it all in one account. I am lucky that our monthly income would cover most unexpected expenses without using separate savings.

You are made redundant, you have no monthly income. Now what? You will be very glad to have 6 months of expenses covered by your emergency fund. Trust me... been made redundant twice since 2017.

My savings & isa are with Lloyd's and have 0.20 interest rate. It's terrible

So move it, no-ones forcing you to put your money in a low paying account. If you decide it's not worth the effort, then you can't moan about the rate. You can get around 1% for a few minutes work online.

The best rate at the moment is with NSAI but you have to move your money in and out in chunks of £500 or more, which might not be suitable for you, but there are other options paying a slightly lower rate.

www.moneysavingexpert.com/savings/savings-accounts-best-interest/