Though many have suffered financially from the COVID-19 lockdown, some Brits are enjoying a mini-windfall due to lower spending. If your savings have received a boost, how can you make the most of it?
They say it’s an ill wind that blows no-one any good. In the midst of so much bad news – both personal and economic – around the COVID-19 pandemic, there is one surprising silver lining. Even has millions of Brits have suffered financially from putting their businesses on hold, many others have been saving at an unprecedented level.
Currently over 6 million employees are on furlough, with the government paying 80 per cent of their wages. Although these employees have suffered a reduced income, many more (around 20 million) have been able to continue working from home, or in an ‘essential workers’ capacity. However, with millions no longer facing travel costs, and being unable to spend on anything that involves going out, many Brits are finding that their income is exceeding their spending – in some cases, for the first time. Even some of those on furlough are finding that they have a monthly surplus.
How locked-down Brits are saving more
According to a study by AA Financial Services, 85 per cent of UK adults have spent less during lockdown. The average Brit has saved (per month) £49 a month on petrol, £57 by not going to pubs or restaurants, £53 by not going to shops, and significant savings in other areas, totalling £617 a month on average for those still receiving their full income. The report also found that 31 per cent of people with savings accounts had increased their monthly deposits since the start of lockdown.
This was confirmed by Bank of England data, which found that personal bank deposits had grown by three times the recent average. The Bank also revealed that consumer debt was down by £7.4 billion, to just half the level seen in February. Those who are benefiting from excess income are in many cases using their spare money to pay down debts, while choosing not to take out new loans due to increased uncertainty.
Interestingly, these figures are almost directly reflected across the Atlantic: The US Bureau of Economic Analysis has published data showing that personal saving in the States is up by 33 per cent, which again is three times what it was in March. According to current estimates, spending across the major economies is down by 20 to 30 per cent, and much of this slack is being diverted into savings accounts.
Of course, a lot of this money is just recycled taxpayer cash – some £17.5 billion has been paid out to furloughed workers, and £7.2 billion to self-employed people currently unable to trade. But for the individuals themselves the money is real enough – at least for the time being. So if you have benefited from a lockdown savings windfall, the question is: what’s the best way to benefit from it?
Excess income in lockdown? Choose how to use it
An excess of income is a nice problem to have – even if it’s just temporary. Here are the main options for putting it to work, and their pros and cons.
Pay down short-term debts
If you have outstanding credit card debt (i.e. you haven’t been paying off the full amount every month), the single most cost-effective thing you can do is clear this debt. When you fail to pay off the whole monthly balance, you pay interest on the whole balance, not just the part that you don’t pay off. Failing to clear it means that effectively you pay over the odds for everything you buy on credit. Clearing it, on the other hand, means your credit card company isn’t making any money out of you. Which is nice.
Similarly, short-term loans (such as you might take out for home improvements) cost you more over time than paying for something in one go. There may be early repayment fees, but if you pay off as much of the loan as you can without incurring these fees, you’ll save more money in interest than you could make on even the best cash savings account.
Set up an emergency cash fund
Everyone should have one of these, but far too few do. More than 50 per cent of adults in the affluent South East couldn’t pay an unexpected £500 bill*. You should aim to have around one month’s worth of essential spending in an instant-access cash savings account. Essential spending means all bills you can’t put off (e.g. utilities, mortgage) and housekeeping money (you can assume slightly more frugal spending). Look for an account that gives you the best rate of interest without imposing penalties on withdrawals.
In addition to the above, you could also set up a longer-term cash fund, holding up to three months’ worth of spending. This one wouldn’t need to be instant access, so you could obtain higher interest rates. Bear in mind, though, that savings rates are at an all-time low.
Overpay on your mortgage
You should have the option of paying your mortgage provider more each month than they require. The benefit of doing this is that you pay down the debt faster. The quicker you can pay off your mortgage, the less you will pay in interest, so the cheaper your loan will be overall. Paying off a mortgage too fast can result in an early repayment fee, but your provider (or mortgage broker) will tell you how much you can overpay before this is charged.
Overpaying on your mortgage is generally better long-term value than putting money in savings, as even a high-interest savings account is unlikely to pay as much interest as your mortgage is charging you. The downside is that it will be some years before you feel the benefits – but once your mortgage is paid off, you’ll have a lot more cash to spend. Think of it as a long-term investment.
Invest in the stock market
The coronavirus lockdown caused a major crash in share prices, which will have made a great many investors jumpy. However, in the three months since the plunge the FTSE has recovered around half of the losses it suffered, and has already climbed back to 2016 levels. Nevertheless there is still the potential for considerably more recovery, if the world economy gets back on course (the key question). If you take the view that the recovery will continue, then stocks may currently represent better value than they did pre-crash.
As always when investing, there are rules of thumb to bear in mind: don’t invest money you may need within five years, spread your risk over different assets, and make sure you also have enough money in low-risk cash savings. Ask an independent financial adviser about finding your appropriate level of investment risk. They can also help create the best stocks & shares ISA for you.
Increase your pension contributions
The COVID crisis has reminded us all of the importance of having adequate pension savings to fall back on. If you don’t need your excess money right away, then few things are better value than paying more into your pension. Every contribution you make gets an automatic boost of at least 25 per cent due to tax relief, and will also benefit from tax-free growth and compound interest over a long period. Furthermore, following the stock market crash there is more potential for fund growth, so now is arguably a good time to increase pension savings.
Take out income protection or critical illness cover
It doesn’t necessarily take a global illness to disrupt your finances – just one that affects you or a key earner in your household. Having the right insurance can tide you over until you can start earning again or retire. Income protection and critical illness cover can provide a vital lifeline.
Spend on the things you really need
We talk a lot about saving here, but the benefits of spending can be significant too – if you do it in the right way. After all, the ultimate purposes of saving and investing is that one day you will spend the money (or your beneficiaries will).
The lockdown has prevented us all from recreational spending and some impulse buying, so it’s a good opportunity to think about what we really want. Think about how you could make your home more comfortable if lockdown continues for much longer, or if something similar happens in future. Home improvements, home entertainments, a more comfortable home office, or even just a spare freezer, can improve quality of life. And with luck, once lockdown lifts, a lot more people may be able to take their dream holidays.
Spending will also be crucial in getting the economy moving again. So although it’s great that more people are saving, the spenders too will have an important role to play.
If you need to see an independent financial adviser in lockdown, then remote advice is readily available.
A version of this article was previously published by Unbiased 4th June 2020
* Research from R3, the insolvency trade body, and ComRes.