Today’s post looks at where to put your savings in order to get the biggest financial benefit. It’s a relatively short one designed to show the importance of making savvy financial decisions.
Where to put your savings can be about saving money or making money. Any time you choose to do something that involves spending or moving your own money, you are making a financial decision.
So how should you evaluate these financial decisions? I’m going to focus here on decisions around your free cash flow. By this I mean the amount of cash you have saved up, or that you generate each month, above and beyond spending on bills and necessities.
You may have some savings already and want to know where to put your savings, either gradually or in a lump sum. Or you may save a certain amount of cash every month, e.g. £500 per month, and want to know where is best to put your monthly savings.
Working out your savings options
To being with, you will need to assess your options for what your cash can go towards. For now, this can be split between two things: debts and investments.
Write down a list of all debts (if any) that you have, and not just credit cards and overdrafts. You should include your mortgage, any car loan you may have, personal loans, hire purchases and anything that you pay interest or fees on each month.
For my own finances, I use a spreadsheet to keep track of all my income, outgoings, assets and liabilities (debts). It’s extremely useful for tracking where I put my monthly savings.
When listing debts, make sure to note the interest rate charged and the total amount outstanding. Include the monthly repayment too.
Once you’ve listed your debts, it’s time to think about there you could put your savings to make money.
This includes savings accounts with banks as well as all sorts of other investments. For example I have a Moneyfarm account [LINK] which invests my savings for me. I also put money into my self-managed investment and trading accounts.
Do you have a blog that you sometimes take sponsored posts on, or host affiliate links? Work out how much you make from it for the amount you’ve invested.
Do you have a side hustle? Can you invest in something that will make it easier for you? An app that will automate some of your tasks? A contractor/freelancer that can do admin tasks and free up your time to focus on the revenue-generating activities.
Do you have an investment account, such as Moneyfarm, that makes a consistent return? Write down (ideally in a spreadsheet!) what that return is.
Do you trade using your own money? If you do, you should know your typical return. Write this down too.
Do you have credit card debts? An overdraft? A personal loan? A mortgage? Write down the interest rate on each of these.
Rank your options for where to put your savings
Once you’ve listed your investment opportunities and your debts, including the expected return and the interest rate respectively, now you can rank them.
What we’re doing here is getting the best possible return for your money under your unique individual circumstances.
Looking at an example will make this process clearer:
Looking at the above table we can rank the debts and investments in order of which costs the most money vs. which makes the most money.
In this example, Credit Card 2 has an interest rate of 19.9% attached to it. This is a charge on your outstanding balance that increase by 19.9% over time.
On the other hand, the highest investment return we can get is through the trading account, which has an estimated return of 15%.
This means the potential saving by using savings to pay off the credit card faster is better than the return we would expect to make on our money from putting cash into the investment account.
The order in which savings should be diverted in this example is:
- Credit card 1
- Credit card 2
- Trading account
- Investment account
- Car loan
- Premium bonds
- Savings account
So it would make good financial sense to put your excess savings against these items in the above order, starting by paying off the most expensive debt first.
I would argue that the above financial ranking is the key metric to use when deciding how to use your savings.
But there are other factors to consider too which will affect where you put your savings. For example, if you put your money into a business which is currently loss-making, but which you think has the potential to make good money in the future.
Or you may be saving up money for a particular goal, such as a planned future purchase e.g. a new kitchen. It’s probably not worth putting this cash into an investment or trading account where there’s a risk of your account going down in value, at least over the short term.
Check out this article for more on goal setting:
It’s also important to keep a certain amount of cash at all times in case of emergencies or unforeseen circumstances. I always keep the equivalent of 6 months of bills and expenses in cash or premium bonds.
But beyond these factors, an up-to-date ranking system is a very helpful tool to automate your wealth building plans and grow your money over time.
Knowing your minimum
So, think of this as a useful system to think about if you’re serious about building wealth. When you know the best return you can get on your money, it’s a lot easier to know where to put your savings.
That could be on a monthly basis, where you can build something like a ‘wealth funnel’. This is as simple as having direct debits and standing orders setup each month to direct your cash straight into your investment and savings accounts according to your ranking.
For some people, this will of course mean using your savings to pay down expensive debt before directing your cash to investments and savings.
If you keep your savings flowing towards the right places, over time you should see your assets grow.
And, if you want to boost your savings, read our guide on genuine work from home jobs you can try to make some extra money.