What to do with "Extra" money?

[MerryGrimaceShake]

Over the last year myself and DH have both had promotions which have increased our salary. From January we will have more money coming in to the tune of about £1300 thanks to nursery dropping off. We are able to live fine without that money coming into "general circulation" so to speak but we don't and never have had a buffer if anything were to go wrong, so when things have gone wrong in the past it has left us quite tight. As such I am looking into various saving schemes, Bonds, ISA's etc but there is a lot of choice and I've no idea where to start. I've never saved or had a pot of savings before.

The goal right now is just to build up an emergency fund so that if the landlord kicks us out/the washing machine breaks/the kids have all simultaneously had a growth spurt we have something there that won't eat into our daily living expenses, and it would be nice to potentially gain some interest on what we are putting in. Eventually we would look at those savings building into a house deposit but right now, unless we get very lucky, we won't be able to own for a long time so aren't bothering with LISA's or whatever there is available now.

I also want to put some away for the kids, starting with their child benefit going into savings so they have something when they get to university age to support their living with a view to top this up once I've gotten to grips with saving in general.

Trying to figure out which accounts would be best for us and what would work well for the kids.

I have an instant access cash buffer in a savings account with decent interest rate. Once that's at a level I'm comfortable with (to cover emergencies) I put any extra cash into a Vanguard ETF (low costs) within an ISA tax wrapper.

Start putting it into an easy access savings account.

Decide how much emergency fund you need. Eg 2000

Then every day £5 k or so transfer into a fixed term deposit.

Perhaps a house deposit?

I think you're crazy not to consider a LISA for a house deposit. If you can save that much each month it will very quickly build up. If you put in £4,000k before April then you will get a free £1k from the government, and put in £4k in the new financial year and you'll get another free £1k which is well on the way to a house deposit.

This!

I would put £300-500 per month into a savings account with the bank with whom you have your current account, so easy access and you can move money between them on your app. I do this and it means you can pay for school trips and shoes or a car repair easily

then I would get an ISA for the other £800-1000. I like Skipton - good rates and a really easy to use app. Have a look at their website for the offerings. Which one you have depends on how quick you want to access the money

if you have workplace pensions, you could consider paying £100 per month extra into that.

Why aren’t you interested in a LISA when you can get free money from the government? If opening a LISA isn’t a feasible option then I would put half the money into a stocks and shares ISA and the other half into an easy access account paying at least 4.5% interest.

If you don't have an ISA that's the obvious place to start.

If there's a realistic chance of buying a house even if it's a few years away, you should both get LISAs so you build up a few years of the bonus from the government.

Also put savings in the best instant access you can find to build your emergency fund and save for annual and irregular expenses (it helps to view these differently because some costs will crop up in the next few months, so money that gets spent on this isn't genuinely spare saved money - eg clothes for DC, Christmas, insurance, holidays etc but hopefully the landlord kicking you out or job loss is much less likely, so this would be your true 'emergency' money).

The financial flow chart is good for getting your thoughts in order and keeping on track with finances

https://ukpersonal.finance/flowchart/

Open a LISA now with a small contribution so it’s there for future consideration

I save in premium bonds between ISA years and then transfer out £20k each April into a new one - the funds are accessible within a couple of days

Was going to post the personal finance flowchart, but I see that @Bjorkdidit already did 🙂.

Definitely have a look at it, it's great.

I have been putting £50/month into a child ISA for my DD since I went back to work after maternity so she already has a savings pot.
I split my 'extra money' between various savings plans depending on the interest rates offered, so I have a couple of regular savers accounts, one 'round up' account and a couple of other savings pots that I flit between depending on need & interest offered.

Assuming that you have no consumer debt, in your shoes, I would

1. save an emergency fund. Aim for enough money to cover 100% of your living expenses for at least 3 months. 6 months worth would give you greater peace of mind. This needs to be in an easy access saver or ISA at the best rate you can find so that you can get access should you need it. You can borrow from this to cover unforeseen emergencies like your washing machine dying, so long as you replace the borrowed money ASAP.

2. starting some sinking funds to help make the day to day living more affordable and create greater wiggle room to absorb financial shocks. For example, big annual insurance policies are always cheaper if paid in full rather than monthly. Look up how much you paid for your policy last year, divide it by 12 and stick that in a savings account each month (you could set up a direct debit to automate this). We save in this way for shorter term goals like

• car insurance, MOT and breakdown policies
• car maintenance (mot, annual service and a few hundred pound to cover unexpected repairs)
• house insurance
• Christmas
• our next holiday
• our next renovation project
• my prescription glasses and sunglasses (£10 a month is much more palatable than several hundred pounds in one hit!)

This system has saved our bacon so many times over and really helps reduce financial stress over time by building capacity in your budget in a very affordable and sustainable way. I like to use Zopa and Chase for this because you can have lots of different 'piggy banks'. The interest rate is slightly less than the market leading accounts but still reasonable. If you're not in the habit of saving in this way, it takes about 6 months for you to really start to see it making a difference. Within 12 - 18 months of sustained use it will make a huge difference to your finances.

3. Only once you have 1) and 2) in place would I start thinking more long term, e.g. savings for your daughter, house deposit, improving pensions and retirement savings etc. By doing 1 and 2 first, it gets you into disciplined savings habits, puts you on a stronger financial footing and reduces the likelihood of you needing to dip in to your savings because of an unforeseen event. This also means you will be able to risk locking more of your money away to take advantage of higher rates of return.