What to do with your money: at a glance
- What do I need to know? Leaving your money in low-interest accounts could mean it loses purchasing power to inflation.
- What does it mean for me? Saving and investing the extra money sitting in your bank could mean you have more when you need it.
- Why does it matter? Putting a plan in place for your spare cash can protect and grow it, giving you more options for the future.
If you’re wondering what to do with the money sitting in your bank account, the good news is you have plenty of options to either save or invest your spare cash.
In this guide, you’ll learn about the different options for your money, from saving and investing to making pension contributions or outstanding payments.
What should you do with your money?
You might be tempted to keep your spare money in a current account or your existing savings account so you have it when you need it. This can even seem like the safe option, putting cash aside for a rainy day.
But money sitting idle isn’t just at risk of losing value to inflation. It’s also missing out on potential growth available with high-interest savings or investments.
And you don’t have to restrict yourself to one or the other. A balanced savings and investment portfolio gives you access to cash when you need it, while taking advantage of compound interest and high interest rates.
So, what should you do with your money to make sure your earnings match your ambitions?
High-interest savings
You can keep your money in high-interest savings accounts without locking it away. Instant access savings give you the flexibility you’re used to with a current account, while also earning more on your funds.
Some savings accounts pay interest monthly, giving you a near-instant return compared with long-term investments. And if you don’t need to touch your money, you can supercharge your savings through compound interest.
Savings accounts can offer protection, too. If the bank is approved by the Prudential Regulation Authority (PRA), you’ll get Financial Services Compensation Scheme (FSCS) protection up to £85,000 on your deposit.
When investing a larger amount, spreading your wealth across multiple accounts can help to keep your full balance protected.
Savings accounts: what are your options?
High-interest savings accounts offer flexibility depending on your needs. You can choose from:
- Instant access accounts: If you’re keeping cash aside for new opportunities or emergencies, you might want immediate access. Instant access accounts provide this, although you might get a lower interest rate than alternative accounts.
- Fixed-rate accounts: Locking your money for a fixed term, like one, two, or five years, could see you get a higher interest rate to grow your spare cash. Fixed-rate savings accounts also give you a predictable return, helping you plan for your future.
- Notice accounts: These accounts balance the benefits of higher interest rates and access. You can withdraw your money as long as you give your bank some warning, while earning competitive interest.
Invest for long-term goals
What you have now could be worth more in the future if you invest it strategically.
Investing can often provide significant returns on your money, outpacing inflation to grow your purchasing power.
But you can risk losing your money when you invest. There are no guaranteed returns, and it can take longer to withdraw your cash when you need it. There might even be charges for withdrawing your money before an agreed time.
There are plenty of options when it comes to investing, though. And a balanced portfolio can protect your money against the unexpected. Even if one investment underperforms, it’s less likely that multiple asset types will struggle to grow at the same time.
Investments: what are your some of your options?
Some of the popular and accessible investments you might wish to add to your portfolio include:
- stocks and shares ISAs
- ETFs
- bonds
- property
Combining your investing and saving efforts could be a way to grow your money in the short and long term, balancing access, risk, predictability, and growth.
Put money aside for retirement
If you’re wondering what to do with a spare lump sum or extra income, there are tax benefits to putting money aside for retirement.
When it comes to saving, pension contributions can often give you the most value, as HMRC provides tax relief when you save for retirement. This means that you won’t pay tax when you deposit funds into your pension. You’ll only pay Income Tax when you withdraw the money after you’re retired.
Your pension is taxed at your Income Tax rate. So, if your income in retirement is lower than it is now, you may pay less tax on your pension than if you took the money as regular earnings.
Alternative options for your money
Saving and investing aren’t the only ways to make the most of your extra funds.
Free up future cash
Using a lump sum like an inheritance to pay off outstanding commitments, such as your mortgage, could free up more cash each month from your income. This can give you greater flexibility and leave you with money available when a better rate or opportunity arises.
In some instances, you could also reduce long-term interest payments by settling these liabilities, too. But some loans can come with early exit fees, so it’s important to weigh these costs carefully to make sure you’re not losing money.
Philanthropy
Your spare cash could also help you meet your ethical goals, by donating money to charities or projects that mean something to you.
Frequently asked questions about what to do with your extra money
What is the best thing I can do with my money?
It’s wise to protect and grow your money’s value, so it doesn’t lose purchasing power to inflation. This means you’ll probably need it to earn interest or invest it so that you make greater returns.
Exactly how you save or invest your money will depend on your preferences for access, risk, predictability, and growth.
But a balanced portfolio combines these factors, protecting your wealth if one asset underperforms and making sure you always have access to some of your money when you need it.
Where can I put money instead of savings?
There are plenty of alternatives to cash savings, including investments, bonds, and retirement contributions.
But they might not always give you the same benefits in access or predictability that come with different types of savings accounts. Especially when you can earn high levels of interest.
That’s why it can be sensible to have a balanced portfolio that includes a cash savings element, alongside other investments that might be riskier but could provide high returns.
Grow your money while you plan what to do with it
Leaving your money in a low-interest current account means you risk eroding its value. While you plan what to do with it, you could put your money in high-interest savings accounts instead.
This doesn’t just protect and preserve its value right now. It can also give you more freedom and opportunities to take advantage of when the time is right.
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