How should we prioritise savings, investing and mortgage overpayments?

[XebraFish]

Me and DH are middle earners. Together we take home just over 7k a month after pension contributions and all our direct debits/bills come to 3000. Then I budget for food, kids activities, some personal spends etc as well as some sinking funds for holidays and car costs. We have a very big mortgage of around 480k and approx 300k equity. We don’t have any personal investments other than pensions but also don’t have any loans or debt other than mortgage and one 0% credit card that we put some building work on but I have the funds to pay that off sat in a 5% savings account and will keep it there until needed as the interest is free money. We have very little in any other savings due to aforementioned building work as well as maternity leaves, only around 5k. However we have approx 200k in trust but that will not be accessible for another 10-15 years and we do not benefit from the interest on that so I try to ignore it although in my head it is earmarked for the mortgage.

I feel that we are in a quite unusual position and not sure what we should be doing with our income. We are not mega high earners but we do have funds in trust which I understand most people don’t and we have around 2k spare per month to save or invest. At the moment my first priority is to build up the cash savings buffer to cover around 6 months basic expenses which for us would be 3000 DDs+food and fuel= 3800x6=23k. But after that I’m not sure what to do with the 2k spare. On the one hand it feels like quite a lot but obviously nowhere near what some people on here seem to be investing etc and certainly not worth me paying for any sort of financial advice.

Sometimes I think we should be aggressively overpaying the mortgage but then I’m not sure if we should be investing instead as the average returns are higher? Also even without investing we always seem to be able to find a savings account with a higher rate than our mortgage so I don’t know if overpaying is worth it. Sometimes the massive mortgage freaks me out and I think we should move and cut it right down but then I know we have the money in trust and also the mortgage payments of 2k a month won’t feel so huge in 20 years time and the house in theory should also be an asset that we are paying off. I don’t understand or trust our work pensions at all for various reasons so I’m reluctant to pay more into those as I’m not convinced we will see proper returns (it’s a very complicated scheme). I don’t know if we should open a LISA for ourselves for retirement and/or for our kids? At the moment I save £50 a month for each of them into their own accounts (I don’t want them to have multi thousands in these when they turn 18) and then £300 a month for them into an account in my own name but I know this won’t be enough to be able to give them house deposits or anything.

Finally I’m also aware that the budget I run is actually fairly lean by some people’s standards (eg we have an annual holiday budget of 4K) and I wonder whether I should actually be spending a bit more and worrying less about savings - we could spend an extra 10k a year on holidays or fun money and still save over 1k a month.

Basically I’m a bit overwhelmed by the options and would be grateful for advice! Thanks

We're in a similar position, maybe a few years on from you, but with a cheaper house!
We overpayed our mortgage and it's now paid off. Half of me really regrets that. It's very nice to have that feeling of security but it was the easy choice that we made when we didn't understand investing. It wasn't the best financial decision.

What I'd suggest would be to open SIPPs for you, DH and your kids. Put in a token amount (£20 to £50) into the kids, long term consistent contributions matter so much more than the monthly amount. For you and your DH use up however much you can in your 40% tax bracket (and make sure you do the paper work to get the the full 40% tax relief on those contributions )

Then open S+S ISAs for you and DH and set up a direct debit for just £100 a month into them. Get comfortable with the idea of investing while the amount of money you're using is small and less scarey. Get comfortable with the volitility.

Then save for your emergency fund until you have your £20k

When that's built then reassess putting some of that towards lifestyle inflation (extra holiday, new car, or whatever) and some towards your s+sISAs

Oh god where are you that had such a big crash?!

I’m assuming that if for example I want to keep a 30k SHTF fund that this should be in cash ISA or similar?
Something easy access with the highest interest rate you can get. You could hold £15k and DH could hold £15k to avoid paying tax on the interest if you find a savings account with a better rate than a cash isa

Also if for example the boiler needing replacing and I spent 3k of that 30k then the next month instead of investing my spare 2k I would need to top up my cash fund until I’m back to 30k and then resume the investing? sorry I probably sound like an idiot but this is all alien to me. I guess the other option is that I have 30k minimum in emergency fund and then each month I also save a nominal amount each month eg £200 towards large occasional expenses that are irregular but will come eventually such as new car, new boiler, new roof?? So then sometimes my cash fund will be higher than 30k but then some will be spent occasionally.
I have 2 emergency funds. My £20k emergency fund is for life altering emergencies. Once I built it I don't touch it!

My second one is called 'tiny emergencies' it's for the new boiler, new washing machine, unexpected car repairs etc. This is the one that I dip into when I need to. £2k feels like a good amount to keep in here. (I'd always be able to take out a 0% CC out to top up for a few £k if I really needed and I want to draw a line at some point for the amount of cash savings I have). I currently have a DD going into this each month and when it gets too far over £2k I put the excess in the s+S ISA

I agree that I wish I'd started investing in a S&S ISA much earlier than I did, I only opened one in my early 30s back in lockdown. I started by just opening with one of the robo advisers which made it really simple (Nutmeg....now JP Morgan Personal Investing) and my DH did the same with Wealthify. Both have made us FAR more money than anything else outside of our pensions.

Our broad approach is:

1. Pay enough into our pensions that we are maxing out employer contributions. I also pay in an AVC to boost mine a bit as I'm part time.

1. Emergency savings of 6 months of expenses. We keep ours in premium bonds and we win something most months.

1. Investing separately into S&S ISAs. Mine is roughly earmarked as our early retirement fund to bridge the gap between when we want to stop work and when we want to draw our pensions. DH's is earmarked as saving to help DDs with house deposits. Both are long term so we're not aiming to touch those investments (except for a dire emergency) for at least 15 years, which is long term enough to ride out any bumps in the market. Even after fees my S&S ISA has currently grown by 52% on top of my contributions.

1. Smallish overpayment on the mortgage of £200 a month. More for the psychological feeling of chipping away at it.

1. Tiny payment (£25 a month) into each of our DD's pensions (Junior SIPPs). Obviously we're saving to help them earlier with housing as I mentioned above but with compounding over 50 years plus the numbers on JSIPPs are mad. We'll stop paying into them when they're 18 and hand them over.

DDs have savings accounts but I agree with you I don't want to be handing over big sums of money to them when they're teenagers so this is just where they save half of any money they're given for birthdays and Christmas presents. It'll probably be a couple of grand each by the time they get their hands on it so if they blow it all and have to learn a tough lesson then that's fine ... It's their money anyway.

Id consider the following order:

repay all debt
3-6 months accessible emergency fund
sinking funds for known/anticipated future spends (car, house, holidays, etc)

Then think longer term…do you hope to retire early? Do you need a ‘bridge’ of money to see you from early retirement through to state pension age? If yes, start maxing out ISAs every year.

Don’t invest anything that you will need in the next 5 years.

Make decision on overpayments to mortgage based on your interest rate … you can potentially make more than you’d save if you invest the money rather than overpayments.

Recommend you look up Rebel Finance School…free on YT and FB.

I'm another who wishes they'd started investing into S&S ISAs much earlier. I'm in my 50s, so playing catch-up and rueing the missed compounding effect. I started with a set mix of funds using Moneybox, and as I've learnt more I've changed my portfolio mix. And when the market (and my fund value) goes down eg: by about 10%1 year ago due to Trump tarriffs, I just took the opportunity to put even more in!

Take a look at the recent Martin Lewis TV episode on investing, it was really good and will make you realise it's a no-brainer.

If you are 40% tax payers, make sure you are being tax efficient by putting as much as you can into pensions to get that pre-tax money back - it's like a 50% pay rise.

Otherwise Cash ISAs, some in PBs for fun. You basically don't want to pay tax on any of it. Plus from next year the max you can each pay into Cash ISAs will go down to 12k from 20k (but can put the rest in S&S).

Before you know it you'll be in your 50s & wanting to semi retire, or at least have choices.

I'm assuming your Trust is also being invested?? Do you know what in / how and do you have any say in this??

How old are you and when do you plan to retire?

Do you plan to sell and downsize in later years?

I’m 39 and DH is 40. No idea when we plan to retire really - at the moment we have 34 years left on our mortgage so not any time soon if it actually takes that long! I do have a medical condition which means that my retirement may not be long and/or pleasant and so I don’t want to be working into my seventies. The FIRE lot are impressive and I sometimes wonder whether we’d be able to do a version of it if we sold now, took our 300k (which is the equity we’d have now assuming there’s not a massive crash) and buy a modest house in an affordable area. If we were mortgage free we’d have over 4k a month to spare!

But so we are actually already talking about downsizing or relocating to a cheaper area. Owing the bank nearly half a million gives me a lot of anxiety.

As you both earn well, you could be in a much stronger financial position in just a couple of years. Have you seen the financial flow chart? It is an excellent decision making flow chart that will help you: The UK Personal Finance Flowchart - UKPersonalFinance Wiki

You have a lot of mortgage right now, with a very long term which means you will be paying it off in your 70's which isn't ideal. I know this isn't unusual in some areas of the country, but it's not a position I would like to be in. You also have a lot of equity in your house. You run the risk that mortgage rates will go up too, and that will eat into your spare income. Personally, I'd be considering downsizing or moving to a cheaper area and make more of my wealth more easily available.

The trust that you will get in 10-15 years won't pay half the current mortgage debt, so you can't rely on that to clear your mortgage.

Do you have life insurance to pay off your mortgage in the event one or both of you dies? If not, I would suggest this is essential to do immediately.

So, onto the short medium and long term financial stability.... we have cash savings of a year's income. I don't earn much and if my OH loses his job he's going to struggle to find a job in his field at his age. You can get by with 6 month's worth of cash if you have a death in service benefit with work, and also a good sick pay package (OH gets 6 months on full pay). After 5 years in this job, he is finally feeling we could reduce our cash buffer to 6 months of expenses instead of 12.

If you spend this cash buffer on new car, washing machine, essential house maintenance etc) then you have enough disposable income to top it back up quickly.

For the long term, you need a pension - do both of you have workplace pensions? Is either of you a higher rate tax payer? If you are, then after building your 6 months cash, I would put any income that attracts 40% tax into the pension, salary sacrifice is best but you'll get that 40% back either way from the government, so it's the quickest way to see your money grow!

If not paying 40%, then you need something for the medium term, a S&S ISA - you are right to be worried that if you need money in a hurry you don't want to have to pull money out of S&S investments at a time outside of your control. But if you have a 6 month cash buffer, you have a 6 month window to withdraw your investments. You should also build up your ISA with monthly contributions - the money you put in now will have longer to grow. Ideally you want to leave it for 5 years so that if there are any dips in the market, there is time for it to recover. Hopefully you've got 5 years before you need to use any of it.

Good luck!

There's no way houses selling for £1 million a few years ago are now selling at a 75% drop, unless the house was sinking into the ground or something. Most areas have stagnated a bit price wise compared to a few years ago, some areas up a little, some down a little but no way has the average house price dropped 75%

I agree - balancing the psychologicol peace of clearing debt against the pure maths of investing, but its really worth doing is "stress testing" your plan against a few worst case scenarios. Like how a major stock market crash right as you're approaching retirement would affect your timeline, or a drop sharply in house/flat prices. If you're torn, a 50/50 split is an easy way foward, and I'd recommend using online calculators / tools to see exactly how redirecting extra cash right now impacts your longer term numbers or potentially pulls your retirement year forward. A few I've used and other which look good on Google for playing around with the variables: MSE overpayment calculator, MoneyHelper calculators for seeing how overpaying shaves off your mortgage timeline, with Which? financial tools and Omnicogi.com for plugging in monthly sums to see exactly how they inflate your long-term investment pot and accelerate your retirement date. Amazing how a small addition to an ISA or SIPP now can change your retirement pot. If you don't like your workplace pension, do look into SIPPs which are essentially a retirement pot you have full control over (e.g. the Interactive Investor SIPP).

You are very vulnerable at the minute.

Any little shock would have you in a fix.

Prioritise building an emergency fund.
The start to put away that £2k a month into an ISA.
Do that in a stocks and shares ISA in a low cost platform - Vanguard or ii (interactive investor).
Invest in tracker fund/ blended funds. You do not know enough to out perform the stock market over time so a tracker fund / equity fund is best. See performance of Vanguard 80% equity over time for example.

Your trust - in whose name? Who tied it up for 20 years? What’s the rate of return and over how many years?

You cannot afford more holidays - if one of you lost your job things would get tight quickly. If you have some big expenditure you’re suddenly very vulnerable.

Long term you will do fine but best not to go so close to the wire on discretionary funds in future.

I agree with all the posters saying sort a pension. That’s vital. Lack of understanding about pensions will do the most financial damage to you. Ask for a one to one with the company provider.

If a plan like Aviva you can periodically put funds into vanguard SIPP to maximize returns.

How old are you? If under 40 open a LISA, you can only invest 4k a year but you get a 1k government top up.
Stick the rest in a S&S ISA, either managed or self invested and watch it grow.
We use bonuses to overpay the mortgage but only up to the 10% penalty free limit.
Stick 20/30k in premium bonds for (almost) instant access emergency fund.

The trade off here is flexibility. Paying off your mortgage is sensible given current rates but it’s harder to access the money in the future. Obviously you could remortgage but if one of you list your job, or wanted to take a break, that’s harder. Investments are more flexible so I would do that but then I like flexibility. You can use your ISA allowance to mitigate tax on the gains from your investments.

Investments / pensions aren't guaranteed but on average are likely to return/yield more % than your mortgage is costing you (although I don't know your specifics). Also with a pension you could get some tax relief (ie reduced income tax).

Yes that’s true but even less flexibility on the pension contributions (and they make the point that they are already contributing to pensions).

I have some money in trust and so does DH. They are both for the same reason, a deceased parent and a surviving spouse who has a lifetime interest in the trust for housing so it will not be accessed until the surviving parent passes away.

Ok understood. So a future inheritance of sorts but value can fluctuate depending on maintenance and upkeep from current person living there. It’s sure but value and timing uncertain.

How certain is the 2k a month spare? And where is that money going at the moment if not into a savings account?

If its truly spare, snd not disappearing into kids birthday this month, weekend away next month, car mot August etc etc, id put 2k a month into a cash account (savings or Cash ISA - whichever has the better interest rate) until you have 3 months plus the new car costs.

Then id keep topping up the cash account with 1k a month, and drop 1k a month into a S&S ISA.

This will keep the cash levels rising, but also start an investment account. You can always sweep money from cash to investments if the cash levels become too high.

Note: if you save 2k every month, you will exceed the ISA savings limits most years - should get away with it the year, as you won't get a full year saving.

Just a FYI, your food and fuel amount looks low - is that everything, and calculated knowing some months have 5 weeks?

The 2k per month spare is after bills, food, monthly spending and also putting away sinking funds for holidays and birthdays etc. We have been doing house renovations hence why the emergency fund is very low but we have finished that now so can start to put away that 2k.

The food and fuel I was adding on to the direct debit amounts is a SHTF budget ie we would cut down to basics. At the moment for a family of 5 we spend approx 625 a month on food and household and around 120 a month on fuel.

Oh also me and DH both have ISAs so can save 1k each per month which should be ok. Thanks for the idea about the split, I think that would work well. However we are also considering moving to reduce our mortgage as it’s expensive and leaves us vulnerable to interest rate rises.