What to focus on financially?

[Bluegreen143]

If you had no debt except mortgage and around £2k in emergency savings, what would your priorities be for spare cash?

• 2 kids, 5.5 and 2.5, so soon very little childcare costs for the little one

• one FT earner (around £32k) and one PT earner (£30k FTE so it’s about £20k pre tax because I’m part time)

• mortgage with £112k on it (£175-180k estimated home value), no car loan or other debt except student loan which I don’t earn enough for repayments to kick in

• my job is on a fixed term contract so has 6 months left, they are saying they are very keen to make me permanent but it’s not guaranteed til it happens of course)

• not totally decided on whether to have a DC3 in a couple of years or whether to stick to one child (depends a bit on if I get kept on)

• pensions aren’t in amazing shape as I took time out as a SAHM and DH started contributing late; we are both still in our 30s though and now contributing enough to get max employer contributions

• factored into our monthly budget is saving into “pots” for Christmas/birthdays, car replacement, doing stuff to the house and holidays.

So with the amount we have leftover to save each month (on top of the pots mentioned) would you:

1. Overpay the mortgage (I do this a bit just now just rounding it up to nearest £100)

1. Build cash savings/emergency fund up more given potential job insecurity or third child in a few years? Though we know if we are frugal we can live off DH salary as did so for years. But we are getting used to having a bit more to spend… DC3 would only be in the context of a permanent contract at work and the company has a generous maternity policy.

1. Build up pensions (I do already put £50 a month into a LISA on top of my workplace pension but DH hasn’t done anything like this)

1. Build up an amount of money to invest eg in stocks & shares ISA.

Or some combination of the above? We are probably talking £300-400 spare each month but I put £100 into our help to save accounts (which we opened when DH was furloughed and I wasn’t working). So maybe £2-300 left after that. Whenever we use any of the emergency fund I then use this cash to top it back up to £2k but it’s there now so tentatively hoping we don’t have an emergency in a while so we can do something else with the cash for a bit 🤣

I know we are in a fortunate place to have spare money - we haven’t always been in this place so I want to use it wisely to benefit our futures.

Oh I never know how to edit posts on here - meant to say current childcare around £650 p/m so once we get the 30 free hours we may end up with up to £1k a month extra as the leftover cash for savings is how much we have atm. But if we have a third child we will obvs go back to having nursery to pay so I don’t want to get used to the extra for now.

It sounds like you're very well organised, financially.

The only thing I'd add is likely house repairs as even fixing guttering can set you back. What age and state of repair is your house in? Have you plans to move?

Have you looked at the flowchart that is often posted on personal finance threads? ukpersonal.finance/flowchart/

Personally I would start with the emergency fund on the info you've given here. The usual recommendation is to aim for around 6 months or so (depending on job security etc) before starting on longer term investments. If you had a sudden major house expense or something happened to your DH's job then that £2k would be gone very quickly.

I'd then do a bit of thinking about long term financial goals and make sure that I had detailed info on pensions etc before making any longer term decisions.

Lizzie that is a good point. We needed work done on our guttering recently and that came out of our emergency fund as I didn’t have separate savings for that kind of thing so I’ve spent the last couple of months diverting our free cash back into the E fund. Not sure whether £2k is the right figure for this - maybe it needs to be higher - but I’m kind of impatient to start overpaying our mortgage more etc. It’s 28y into a 30y mortgage (we have lived here longer but remortgaged back to 30y when I wasn’t working to make the mortgage more affordable) so I don’t actually want to still be paying it in our 60s. But that said, with some future uncertainty re my work and third child it may be better to err on the side of having more cash. Plus I could probably do with putting more in the car pot than I currently do as it’s only got a few hundred in there and the car is 11yo (it did pass its MOT with no faults though).

Mia that flowchart sounds perfect for me, thank you! Exactly what I was after!

I would put it into emergency savings - how long would your savings last you if DH lost his job or you needed a new boiler or had car issues? The advice is generally to have 3-6 months of expenses in emergency savings which I don’t imagine your £2k would stretch to.

Yes, I like the flowchart.

What to do for the best is probably dependent on your mortgage rate, attitude to risk and the likelihood of very big purchases in the future like an extension or moving to a more expensive property.

If you have a decent mortgage rate (some people are paying 1% or less) you can afford to leave it to run it's course as you'll almost certainly beat that rate over time in investments, taking ups and downs into account.

The best return will be pensions, due to the tax relief, but the downside is that the money is locked away until you're 55 or possibly slightly older depending on your age.

Investments are likely to beat cash savings, but you're at risk of needing to take the money out when the market is low, so having cash too helps avoid this risk.

Probably worth doing a mix and then moving more towards investments once you've hit a decent level of cash (or cash like - premium bonds could be an option and if you have more than about £10k worth, you'll probably get a better return than normal instant access cash savings) savings.

Do you have any savings for your children? They will probably get more expensive as they get older.

@sleepyhoglet - I do have a “pot” for kids’ stuff but it’s been raided to buy uniform for DS starting school next week so it’s currently empty 😅 maybe could do with upping contributions to that. I’m not a huge believer in savings in the child’s name - I’d rather get our own finances in shape so we aren’t a burden to them/can support with things like university or home deposits on our own terms.

That flow chart is really helpful and most of you have confirmed what the flowchart says re building cash savings up further before investing or OPing the mortgage. I think my head knows this, it’s just after several years of scrimping my heart is keen to move into the more glamorous projects like paying down the mortgage!

Half and half:
So: £500 pm mortgage overpayment and £500 pm into emergency fund
Ideally as an absolute minimum you should have 3 months wages/outgoings in savings

Paying down the mortgage is purely psychological and rarely makes financial sense in current times of low interest rates.

The times of saving thousands due to overpaying are long gone. Focus on more profitable investments and take comfort that you are still increasing your assets whatever you do with the money. If interest rates did start to rise, you could always move the money around later.

I am having similar. I was overpaying mortgage but have stopped that temporarily

I am boosting my pension short term for 6 months and then that will go back to normal.

I have pots for regular expenditure such as pets, car, small household jobs, birthdays.

I then have a general pot. At the moment I have a lot of it allocated to a holiday for next year. My emergency (Unallocated) fund is about £6k - in my mind I want to get it to £10k. I then have specific things I also need to save for - future work on the house, daughter going to uni etc. I did consider seeing a financial advisor to help me balance mortgage vs pension vs savings (and what type) especially as I have 3 pensions funds I didn't know whether to merge or keep as they are. I have decided to put that off for a bit am I am now tracking my funds monthly to just make that decision myself.

Pattypan, you raise a good point that we can live off DH’s salary if we scrimp but not my salary. In terms of basic expenses, bills/insurances are about £1,350 a month (£650 is childcare, £420 is mortgage) and we really need £4-500 for bare-bones living expenses each month and that isn’t including wants, savings pots etc. So it’s probably safe to say we need £5-6k for a three month emergency fund and maybe that ought to be my next goal.

I'd say build up emergency savings first. Having a "buffer" to cover a period of unemployment, emergency house repairs, car repairs, etc is a lot more important than saving a few pounds of interest by overpaying the mortgage.

Once, and only once, you've got a pot of emergency savings, can you move onto the other things.

I'd suggest that a 3rd child is too expensive. I'd really think very hard about whether you can actually afford one. Might not be the nice answer, but if you think your pensions are only just starting out, you've got a lot of catching up to do.

Savings.
A pot of 6 months living expenses, then look at the other stuff.

We have very similar circumstances!
Similar mortgage/home value, earnings and 'pots' that we save for.

However, we're at the beginning of our parenting journey, DD1 due this month.

Pre baby we have been using 'extra money' to save as follows:
£600ish mortgage overpayment (started this once our emergency fund hit 20k)
£200 short term emergency fund
£100 into mutual funds as a form of private pension (unofficially, funds still accessible if we need them)

When DD needs childcare, we'll stop the mortgage overpayment.

I think what I'd do in your position is to see if the whole family could live on your husband's wage in terms of bills, food, childcare etc, then use your wage to pay for the mortgage, pension upgrades and savings - short term and long term. Would that be possible? When childcare stops/reduces then your husband's money could also be used to save for things like another car or holidays.

I wouldn’t have a 3rd child on those salaries- id focus on savings, a yearly holiday perhaps- pre school children are relatively cheap- happy with the park and a happy meal- older kids demand/ need more: school trips, uniform, activities for the endless holidays- save now!

Are you saying the £2k is the total of your savings? Or just your easy access savings. In either case I would definitely focus on that first, maybe 10k min? Then you can work on the mortgage. That would be my plan.

Have you looked into lifetime ISA's (if under 40)? I've not long opened one as I want to supplement my pension. Can pay i up to £4K per tax free and it will be topped up by 25%. A few other bits to consumer but worth looking into.

One potential reason for paying down the mortgage a bit would be if it reduces your LTV and got you access to better deals next time you mortgage. Your LTV already looks pretty good though so it might not make a difference.

Thanks all for the many different things to think about, even the unsolicited family planning advice 😆 let’s face it, that one is always going to be a very personal decision but I appreciate everyone taking the time to leave their perspectives.

I think there is a broad consensus that cash savings need to be higher before overpaying one’s mortgage, and that OPing may be less sensible than focusing on other investments and pensions. I think this is pretty sensible and I’m getting a bit ahead of myself with other financial goals so will stick to building the cash savings for now.

In terms of your point Hollow Talk re whether we can live off DH’s salary - we can, we did for several years until about six months ago as I was a SAHM. We were pretty frugal by necessity. As we have more coming in now we have been enjoying having a bit more cash so we haven’t been saving ALL of my salary and just living off one - we now allow ourselves 20% each of our salaries to keep as personal money (I do save some of mine though) and we had a lovely week away in Scotland in June and have booked the same next June so we put money in a holiday pot each month now - we didn’t go on holidays when I didn’t work.

In terms of budget, our joint budget (i.e. the remaining 80% of our salaries + child benefit) is £2,900-3,000 depending what DH gets that month. So we are about £1,900 with monthly bills, food, petrol, other household essentials. The rest gets split between fun money, different “pots” (Christmas/birthdays, holiday, kids, home & garden, annual bills) and longer term savings like the emergency fund and new car fund.

So my question is when you calculate the 3-6 months emergency fund, do you work that out as 3-6 months income (£3,500 per month or so for us) or 3-6 months of bare-bone expenses (£2,000 each month) under the logic that you wouldn’t be contributing to savings or frivolities if unemployed? Or somewhere in between? How do you all work your emergency funds out?

Oh another question! Sorry! I would like my husband to up his pension contributions. He already puts in enough to get the maximum employer contribution. But for extra on top, is he better off putting more into that pension or opening a LISA? He is 37 if that makes a difference.

Mia, I thought that about LTV but even if we OP, our LTV will be under 60% at next remortgage date as we have three years left in a five year fix. Barring a huge housing crash of course!