Despite the economic hardships of the past 12 months, figures from data provider Moneyfacts show that UK households increased their excess savings from £112 billion in January to £163 billion in October – a rise of £51 billion.

Knowing what to do with your excess savings is important at any time, but particularly during this period of high inflation. In February 2022, the Office for National Statistics (ONS) recorded that the Consumer Price Index (CPI) had risen by 5.5% in the 12 months to January 2022, the highest rate in 30 years.

Inflation reduces the spending power of your money over time, as the cost of goods and services rises. That means leaving cash to stagnate in a savings account could see it lose value in real terms.

Perhaps you’ve noticed that you’re now holding more cash in savings than you normally would? This may leave you wondering what you can do with these savings to avoid the eroding effect that inflation can have.

So, here are a few suggestions for what you could do with your excess household savings to make the most of them, especially during a period of high inflation.

Check that your emergency fund is sufficient – but not too full

The first area that you may want to consider for your excess savings is your emergency fund.

As the Covid-19 pandemic has shown, unexpected events might be just around the corner. And, while such emergencies are few and far between, you never know when you might need a pot of money to rely on.

Your emergency fund should contain between three to six months of your expenses, held in an easy access savings account. That way, you can be confident that you have money set aside in cash to pay your bills or your mortgage repayments, no matter what happens.

Bear in mind that as inflation reduces the spending power of your money, you should only hold as much as you need in your emergency fund. If you have more than six months’ expenses, you may want to look for other ways to hold or use your money.

Pay off high-interest debts

Once you’re confident that your emergency fund is suitable for your needs, you could look at paying off any high-interest debts you have. This could include borrowing on credit cards or any other personal loans you’ve taken out.

High-interest debt like this can weigh heavily on your finances. In fact, according to MoneySavingExpert, if you made the minimum payment on borrowing of £3,000 that you took out at age 21, you’d be over age 50 before you entirely cleared the debt.

As a result, it could be a sensible course of action to clear high-interest debt using your excess savings.

Make an overpayment on your mortgage

As well as high-interest debt, you could also consider making overpayments on your mortgage.

By increasing your repayments or even directly paying off a lump sum of your mortgage, you can reduce the total you owe to your lender. This can help you to pay off your mortgage more quickly, meaning you can live debt-free sooner.

Before you decide to do this, it’s important to check whether your mortgage deal comes with early repayment charges (ERCs).

These penalties may directly outweigh the savings you can make by overpaying. Check whether your mortgage has ERCs attached to it before you make a payment.

Look at your investment options

If you have enough saved for an emergency and you’re not concerned about any debts you have, you could try to give your excess savings a boost in the stock market. This can be especially useful in a period of high inflation.

Historically, investments in the stock market have outperformed the rate of inflation. According to trading platform IG, the FTSE 100 index rose by 654% between 1984 and 2019, producing an annualised price return of 5.8%.

Meanwhile, the Bank of England’s inflation calculator measured the average rate of inflation to have been 3.4% a year during the same period.

That means investing throughout that 35-year period would have given your money a chance of not just keeping pace with inflation, but actually beating it.

As a result, investing could be a worthwhile option for your excess savings.

Remember: past performance is not a reliable indicator of future performance. Your investments could fall as well as rise and you may get back less than you invested.

Increase your pension contributions

Aside from investing in the stock market, you could consider making additional contributions to your pension.

Each tax year, you can make and receive tax relief on pension contributions up to the pension Annual Allowance. In the 2021/22 tax year, this threshold is £40,000 or 100% of your earnings, whichever is lower.

So, contributing your excess savings to your pension could allow you to save that money for later life, while also making the most of the available tax relief and any potential investment returns your pot generates.

Bear in mind that investment returns are not guaranteed, and you could end up losing value on your savings. Your savings are also tied up until age 55 (rising to age 57 in 2028) and so a pension may not be appropriate for shorter-term savings goals.

Speak to us

If you’d like guidance over what to do with your excess savings from an experienced financial planner, please contact us at LightSide Financial Planning.

We’ll take a mathematical approach to your savings, showing you the benefits and drawbacks of the choices you can make with your money.

Crucially, we’ll make sure that whatever you decide to do with your savings fits with your lifestyle and your wider financial goals.

This can give you the confidence that your finances are in line with what you want to achieve in the future.

Fancy a chat? Email or call 0151 372 0161.

Please note

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.