The last few years have been characterised by news stories about high inflation and rising living costs, and many people have been forced to make cutbacks in their budget.
Fortunately, if you have a robust financial plan in place, you may have been better prepared to deal with these challenges. You might even find yourself with some surplus cash at the end of each month if you manage your spending carefully.
Additionally, you could have extra funds from an inheritance, an increase in your income, or a bonus at work, for example.
It can be difficult to decide how to use this extra cash and ensure that it supports your long-term financial goals. There is no “right” answer here as it depends on your own unique situation. That said, there are several options that could be beneficial.
Read on to learn five excellent ways to use spare cash.
1. Boost your cash savings
Having an emergency fund is important as it protects you against financial shocks. This is especially relevant right now as living costs fluctuate and you could face a sudden rise in your outgoings.
It is often recommended that you have three to six months’ worth of expenses in your emergency fund. However, you may decide to top up your savings with spare cash and keep more than this if you are concerned about the high cost of living.
Additionally, you have a £20,000 ISA allowance in the 2023/24 tax year. If you have not used it up yet, it may be sensible to put spare funds in a Cash ISA as you do not pay tax on any interest you generate.
That said, it is important to consider the effects of inflation because your cash savings could lose value in real terms. You may want to avoid holding too much of your wealth in cash savings for this reason.
2. Make investments
If you already have an adequate emergency fund, you may want to consider investing your extra cash instead.
Investments are an effective way to potentially grow your wealth for the future, particularly during a period of high inflation. You may be more likely to see positive returns if you leave your wealth invested for longer because investments have time to recover from market fluctuations.
Consequently, buying into the market with surplus funds earlier in life may be beneficial. Additionally, leaving your wealth invested for longer could mean that you see more growth as a result of compound returns.
3. Increase your pension contributions
Increasing your pension contributions is another excellent way to use extra cash to build your savings for the future.
When you pay into your pension, you benefit from 20% tax relief on those contributions. In practice, this means that a £100 contribution only “costs” you £80. You may also be able to claim more tax relief through self-assessment if you are a higher- or additional-rate taxpayer.
Your employer might match your contributions if you increase them too, and your pension provider invests your savings. This means your pension pot could grow significantly if you increase your contributions by a relatively small amount.
It’s also worth noting that even if you do not have extra cash every month, it may be beneficial to put a single lump sum into your pension as you might still benefit from growth.
4. Pay off debts
High interest debts such as credit cards can make it more difficult to achieve your long-term goals because a portion of your income goes towards expensive repayments each month.
Fortunately, if you can clear those debts quickly, you free up more income. These funds can then be used to contribute to savings, pensions, or investments. Additionally, you save money overall because you pay interest for a shorter period of time.
If you receive a windfall, it could be beneficial to use a lump sum to clear as much of your debt as possible. Alternatively, if you have surplus income at the end of each month, consider increasing your debt repayments.
5. Gift money to your loved ones
You might find that your emergency fund is topped up, your pension savings are on track, and you don’t have any expensive debts. If you are in this enviable position and you still have extra cash, you could consider gifting money to your loved ones.
In 2023/24, the first £3,000 you gift automatically falls outside of your estate for Inheritance Tax (IHT) purposes.
You may also be able to make regular “gifts from income” if they do not come from capital and you can afford them without affecting your lifestyle. Additionally, you can normally give small gifts of up to £250 to as many people as you like, provided you have not used part of your £3,000 gifting allowance on them already.
Any gifts in excess of these allowances may still fall outside your estate for IHT purposes if you survive for seven years after giving the gifts.
As such, gifting could be an effective way to support those you care about, especially when living costs are rising. It could also reduce the IHT that your family pays on your estate when you die.
Get in touch
If you have some surplus funds and you are unsure about the best way to use them, we can give you some guidance.
Please get in touch to find out how our team of VouchedFor Top Rated planners could help today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.