Having the right amount of savings and ensuring that you are making them work hard for you is your financial foundation. It allows you to escape the stress of living hand to mouth, gives you the freedom to know when you can afford to splurge guilt free but most importantly it is the strong base on which to build your financial plan. Here are all the essentials you need to know-
How Much Do I Need In Cash?
Have you done your budget planner? If so you will need it now. If not click here to do it. Once you have done your budget planner, what is your average monthly expenditure?
Let’s say this is £2,500 per month, you will need between 3 to 12 times this depending on many factors:
- If you have dependents, or are free and single
- If you have good sick pay and income protection benefit from your employer
- If you are cautious or not
- What naturally feels right
If you have no dependents, excellent work benefits etc. then you might feel comfortable with 3 times your outgoings e.g. £7,500. If on the other hand you have a family, no protection from work and are naturally quite cautious, you will probably be closer to the ’12 times’ end of the spectrum i.e. £30,000 plus any lump sums you will spend in the next 5yrs.
Now you’ve worked out your figure you need to take action.
If you have less, your main financial goal (other than paying off expensive debt) is building up your financial safety net. Commit to a regular monthly amount, by setting up a standing order the day you get paid, to the best savings account- read up on Cash ISA’s below to understand their benefits.
If you have more than this figure — you may want to consider if you have too much cash. I bet you thought you’d never hear this!
Why Is Having Too Much Cash A Bad Thing?
The interest rates (the amount your bank pays you) very rarely beats inflation (the rate that prices increase). Therefore your money in cash is not working hard for you. In fact it is actually reducing on an annual basis in real terms.
Therefore any money over and above your calculated figure (see previous questions),once debt has been paid off, should be considered for investment or put to hard work elsewhere. Find out more about investing under the next steps header.
What Is A Cash ISA?
The tax year runs from 6th April to 5th April. Each tax year, you are allowed to save up to an amount pre-determined by the government into cash ISA. In the tax year 2-15/16 this is £15,240.
Why Would I Want To Use A Cash ISA?
If you do not save into an ISA, but an ordinary savings account, you will be taxed automatically on the interest at 20%. If you are a higher rate or are an additional rate tax payer, then you will owe the tax man more in your annual return.
So in a nutshell – Using your ISA means more money in your pocket and less in the tax man’s.
Should I Use A Cash ISA?
If you have available allowance then the answer is always YES. Except: – If you intend to invest in this tax year and therefore you predict that the return you will get on your investments is greater than your cash ISA. You should therefore forgo your cash ISA in return for a Stocks & Shares ISA – If the net (i.e. after you have paid tax) savings rate offered in a non ISA savings account is higher than that offered in your ISA. – If you are not allowed one – e.g. you’re under 16 (read about junior ISA’s) and are not a UK resident
What Happens When I’ve Used My Cash ISA Up?
If you still want to save more into cash, above your ISA allowance then your options are to consider: – Other non ISA savings rates – Premium bonds – If you are saving above your emergency cash amount and you would prefer not to invest.
Perhaps overpaying your mortgage may make sense, depending on your interest rate i.e. if your mortgage interest 5% capital pa and your savings are making you 2% perhaps you should consider overpaying your mortgage. Please make sure you check with your lender to ensure you are not going to be penalised by doing this.
What Happens When My ISA Rate Becomes Rubbish?
Once your rate becomes rubbish you need to shop around for a better rate and transfer it away. It’s important that you don’t cash in the ISA and then take the money to your new ISA provider, as it will lose its ISA protection; you need to ask your new ISA provider to transfer it from the old one. You will know that your ISA is no longer giving you a good return because either the provider will contact you or it will be in the terms and conditions when you opened it. As a general rule of thumb, ISA rates tend to last only for 12 months.