Where to put extra money?

[WhatsTheWorstThatCldHappen]

We're in a very lucky position, but also at the beginning of a long haul for our mortgage which we took out last year and runs til we're 67 (we're both 44). Combined income of £6k. Mortgage £1400. After everything comes out, we're left with £3,500 a month for food, fun and savings. We've been putting £2k into savings for home improvements but we're pretty much finished now and I want that money to work harder for us. I pay 6% into work pension and DH pays 8%. Both matched. I want to keep some in instant savings for emergencies so what would you recommend? Would you prioritise overpaying mortgage or contributing more to WP pension? Or should I look at S&S?

For the immediate I’d prioritise saving up 6 months’ worth of expenses in an emergency fund. Where you keep it is up to you but should be in an easy access account, not locked away. So either get a decent rate savings account, or premium bonds, or maybe even a cash ISA.

After that - what’s the interest rate on your mortgage? For the last few years the advice has tended to be not to overpay, but now that the interest rates are going crazy you may get a better “return” by overpaying mortgage vs other savings.

Are either of you above the 40% income threshold? It may be worth increasing pension contributions if so as that’ll be the most tax efficient. Also make sure you’re contributing at least the amount to maximise your employer match, as that’s free money.

Otherwise, for any other spare cash - either a cash ISA, savings account; or if you’re looking at 5+ year horizon before you want it, look at S&S ISAs. I use vanguard and put it into an index fund.

Whatever you do, use the “Pay yourself first” method - so do a monthly budget and work out a savings/investments goal. Then once you get paid set up a SO to immediately transfer out that amount; don’t just fall into the trap of “whatever’s left over in the month we’ll save”.

@WhatsTheWorstThatCldHappen

• I agree 6 months worth of savings ideally in a high interest account.
• Max out both your ISA allowances possibly S&S - Interest is tax free so as you build your savings you are not paying tax on interest.
• Do a comparison of the % interest on your mortgage vs net % interest on savings. If the savings % is higher, save up and once a year pay 10% off your mortgage (I assume that is the max allowed). Paying off your mortgage early saves ££. As mortgage and saving rates change review.
• Learn about pensions, in particular state pension and your current schemes and how they operate. If your employer matches % then increasing contributions makes a lot of sense I.e. you get double % plus tax free.
• Diversify, don’t put all into pension, mortgage, S & S. Think short, medium and Long term savings.
• Look at FIRE (Financial Independence Retire Early) threads on MSE and other forums. They have a lot of good ideas whether or not you want to retire early.

Santander have recently released an easy access savings account paying 5.2%. I bank with them so it’s really easy to transfer in and out instantly but I would think it would be straightforward if you have a current account with a different bank.
The other option to discourage dipping in could be an account with limited withdrawals or a notice period. Money Saving Expert keeps an up to date list of the best accounts on offer and the various options.

I’d reduce the term of the mortgage if possible and pay off as much as possible. Dave Ramsey recommends 15 years max for a mortgage. You don’t want to be paying a mortgage at 67.