Saving money in the lockdown? How to use the cash

For a few fortunate sections of society, the coronavirus crisis has not led to financial insecurity. In fact, some households are finding that they have disposable income left over at the end of the month. 

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Those who are able to work from home, at or near full pay, are realising there are big savings from not having to commute or to buy lunch from the High Street. 

Fewer fancy coffees, no dry cleaning bills, no filling up the car, paused satellite TV sports packages and cancelled gym memberships, maybe even a holiday refund…  the savings add up. 

Though perhaps no boost to the bank account is bigger than that from the closure of pubs and restaurants? 

A recent report from the Institute for Fiscal Studies found that on average a quarter of household spending in 2017 went on items now prohibited by lockdown, including eating out, leisure activities, daily transport and holidays. 

So what can you do with that lump of cash that is suddenly left in your current account ? (Except spend it.) 

1. Pay off overdrafts, credit cards or loans 

Andrew Hagger, founder of personal finance site Moneycomms, said: ‘Paying extra off high cost debt such as credit cards, store cards and overdrafts would usually be my number one recommendation as it’s way more beneficial financially than earning 1 per cet in a savings account.’

Someone with a £2,500 credit card balance on a card with a 19.9 per cent APR and paying off £80 a month would incur £921 in interest and pay off their balance in three years and seven months.

But, he said, taking a spare £100 and paying off £180 a month instead would save you £590 in interest, and cut the time to pay off the balance to one year and four months. And you will suddenly find yourself with £180 a month to use as you wish.

Meanwhile, for someone with a £5,000 balance on a credit card with a 21.9 per cent APR, the savings are even bigger. Paying off £132 a month, around the minimum payment required each month, would see you pay £2,956 in interest by the time you’d cleared your balance five years and one month later.

But upping repayments to £232 a month, and you would save £1,713 in interest and pay the balance off two years and 10 months earlier.

Of course, there are still 0 per cent balance transfer cards out there – so even if you don’t have an extra £100 a month to pay off your card debt, you could still save a lot on interest payments by switching to one of these. 

But the ideal is to get debt free so you will have extra money to save or spend, rather than financing debt. 

Start saving!

After debts, if you do not have any savings, then now is the time to start building up a buffer. 

Mr Hagger says: ‘If there’s one message this coronavirus crisis may have instilled in people, it is the importance of having a “safety net” emergency cash balance in case of need, so building up a savings balance may now be much higher on peoples to-do list.’

Although savings rates are very low at the moment, you can still earn something on what you put away to protect against inflation.

Mr Hagger says you should worry more about rates when you’ve got a decent balance. The important thing is building a cash pile and getting into the habit.

What accounts should you choose? 

If you are looking to put an extra £100 away each month, perhaps by standing order, certain sorts of accounts make for better options than others.

Although rates are highest on fixed-rate bonds, they are unlikely to be the best option. You can usually only make deposits up to 14 days after opening them before the money is locked away for at least a year. 

They are better for saving lump sums you don’t need access to at short notice.

You are more likely to be looking at either easy-access accounts, notice accounts or regular savings accounts. Easy-access accounts are what you’d expect – they allow you to deposit and withdraw money whenever you like.

However, some come with bonus interest rates or withdrawal limits, so it’s best to check the small print. Currently, the best rate on offer is 1.2 per cent, or £12 annual interest on £1,000 of savings. 

This is offered by Goldman Sachs-backed Marcus Bank and RCI Bank, the savings arm of Renault.

Both accounts can be opened online, Marcus with £1 and RCI with £100.

Notice accounts are like a halfway house between easy-access accounts and fixed-rate bonds. They pay a higher rate of interest in return for savers having to give a certain notice period before accessing their money, but additional deposits can be made at any time.

Anna Bowes of analyst Savings Champion said: ‘They are certainly worth a look, as if you don’t really need immediate access to your cash you could earn a little more. And with interest rates as low as they are, every little bit is valuable.’

The best notice account which can be opened with £100 or less is offered by mobile app-based Moneybox. It pays 1.45 per cent on a 95-day notice account. Those with £1,000 can earn a little more with Secure Trust Bank, which pays 1.48 per cent on a 90-day notice account which can be opened online.

Finally, regular savings accounts allow savers to stash away a certain amount every month and access the money plus interest after a 12-month term. Because they have lower maximum deposit amounts, they pay a higher interest rate, although the best ones used until recently to be more generous.

And many are tied to current account holders. 

The best option is offered by Coventry Building Society and pays 2.5 per cent. It can be opened with £1 and does not require savers to put in a minimum amount every month, unlike some regular savers. 

Up to £500 a month can be deposited into the account, which can be opened in branch, online, by post or by phone.

There is also one potential wildcard, which is National Savings & Investment’s Premium Bonds. 

They do not pay a fixed rate of interest, but instead pay out monthly tax-free prizes of anywhere between £25 and £1million, which is handed out to two lucky prizewinners a month. Every £1 Bond has a 24,500 to 1 chance of winning any prize, paying an average prize fund rate of 1.4 per cent a year, and they can be bought in tranches of £25.

They can be applied for online, by phone or by post, although postal applications are currently suspended due to the coronavirus. Savers can set up monthly standing orders to pay in £100 a month, and the Bonds can be cashed in at any time.

Or pay down your mortgage?

If you have a savings buffer already, then financially it might make sense to pay down your mortgage rather than add to your savings account.  

Even if interest rates are low at the moment, your mortgage rate is still likely to be significantly higher than what you can earn from a savings account.  

David Hollingworth, from mortgage broker L&C, said: ‘Most mortgage deals will carry an early repayment charge during any deal period such as a fixed rate period, so it is important to check the details of your deal. 

‘However, lenders will generally allow a degree of overpayment without imposing a penalty, typically of up to 10 per cent of the outstanding balance per annum.’

But if you can, it can be worth it, especially if you can afford to maintain paying off more beyond an initial 12-month timeframe.

He said: ‘Overpaying a mortgage can really start to pay off if you can maintain the normal monthly payments and keep up some level of overpayment. 

‘For example, a borrower with a £150,000 repayment mortgage over 25 years at a rate of 2 per cent would pay a monthly payment of £635.78. 

‘Overpaying by £100 per month for a year would result in the balance being reduced by a little over £1,200. However maintaining the standard payment would still see an interest saving of £753 over the life of the loan and the mortgage would be repaid a couple of months early. 

‘Keeping the £100 per month overpayment going throughout would result in a total saving of nearly £7,300 in interest and pay the mortgage off four years early.’

And, just as paying off your credit card will leave you with extra money each month, so can overpaying your mortgage. 

Hollingworth added: ‘By reducing the mortgage balance and not paying interest the effective return on the cash is at the mortgage rate. So if your mortgage rate is 2 per cent that will be the effective rate of return on overpayments. 

‘Because there is no interest being earned there is no tax.’