Five steps to a richer future

Times are tough for many of us financially, but if you're lucky enough to have some spare cash, what should you be doing with it?

The financial crisis hasn't meant doom and gloom for everyone. You might, for instance, be one of the lucky borrowers who is currently enjoying lower repayments on your tracker mortgage. If, for whatever reason, you now have some extra cash burning a hole in your pocket, what should be your financial priorities?

Priority number 1 - Overpay on your mortgage

If your tracker deal has gone down dramatically, then you must be mad not to be overpaying each month.

Overpaying will save you a small fortune in interest payments, as well as shaving years off how long it takes to pay off that mortgage. Even those on fixed rates should be looking to overpay a little each month. With most mortgages, you can overpay by 10% without getting whacked with a charge. Some lenders may allow you to overpay by even more.

On a 25 year £150,000 mortgage, at 5%, an extra £100 a month would shave over four years off the mortgage, as well as saving you more than £20,000 in interest payments!

Luckily for you, at lovemoney.com we have our very own overpayment calculator, which you can use to see just how much you will save overall by paying a bit more each month!

Just be careful to check just how much you're allowed to pay off before you start incurring penalty charges, known as Early Repayment Charges. Some lenders will only allow you to overpay by a maximum of £500 a month or 10% a year.

Priority number 2 - Pay off those debts

Whether it's on a credit card or personal loan, you want to be clear of debt as quickly as possible.

If you have a whopping balance sitting on a credit card, racking up interest, then you need to get a 0% balance transfer card pronto. Move the debt over to that card, and start making payments, safe in the knowledge that your hand earned cash will be going straight towards wiping out your debt, rather than simply covering the interest.

The best card in the market at the moment is Barclaycard Platinum with Balance Transfer, which offers 16 months' interest free, so check it out!

Equally, if you have a personal loan outstanding, then devoting that extra cash towards getting it paid off quicker will not only save you time, it will also save you cash in the long run, again by avoiding paying additional interest. There's no point paying more than you need to!

Again, remember to double-check whether there are any Early Repayment Charges attached to overpaying the loan.

Priority number 3 - Get saving!

Of course, once your debts are out of the way, it's time to get saving!

With Bank Base Rate plummeting to its record low, where it has stubbornly stayed put for the last 17 months, savers have had a pretty rough time of things for a while. But the good news is that some of the best-buys are finally improving, so take advantage of some of the top deals out there at the moment.

You also have a range of different savings accounts to go for.

If a regular savings account (paying in up to £250 a month for a year, and getting a decent fixed interest rate to boot) sounds like your cup of tea, then consider the Norwich & Peterborough Regular Savings Account where you can earn 4% fixed for the next 12 months. You can also pay £200 per month into the Saffron Fixed Regular Saver and earn the same decent rate.  

If you prefer to have an easy access account, then you will need to accept lower rates. For a no-strings account the AA Internet Extra account pays 2.8% with a 2.3% bonus for the next 12 months.

Of course, if you have a pile of cash in need of a new home, then you may want to consider locking it up in a bond.

Personally I'd be a bit wary about putting my money out of reach for years and years at the moment. But if you're OK with it, the Baroda Max Fixed Rate Bond pays 4.9% AER fixed for five years.

Priority number 4 - Open an ISA

Savings accounts are all well and good, but you also need an ISA - a tax-free savings account!

It's dead simple - each tax year you can pay up to £5,100 into a Cash ISA, without paying a penny in tax on the interest you get. You can pay in a lump sum, or even make regular contributions.

If you haven't got an ISA, this should be your first port of call - before a normal savings account. Don't delay any longer, especially if you already have some savings. The longer you hold off on getting your ISA up and running, the more of your money you end up handing over to the taxman.

Recent question on this topic

• Lozza72 asks:

  New job - no pension scheme - what to do next?

  • 
    MikeGG1 answered "The bad news is that you are likely to have a State Pension Age of 70, but that means you have over..."
  • 
    Lozza72 answered "OK, thanks Mike - sounds like sensible advice.  Will have a look at those ISAs and get saving!..."
  • Read more answers

Priority number 5 - Sort out your pension

A pension is absolutely essential in my view, and if you have cash left over each month you could do a lot worse than topping up your pension payments.

Without question the best place to start is Become a pensions expert in five days.

A lot of people are put off private pensions as they have little control over where their money is invested, with many pension funds performing pretty poorly. If that sounds like you, then you might want to go for a SIPP instead, so YOU get to decide exactly where your hard-earned cash goes. Check out How to pick your first pension for more on SIPPs.

So there you have it, five absolutely essential things to be doing with your surplus cash. Don't just sit there looking at it - make sure that money is working for you!

This is a lovemoney.com classic article which has been updated for 2010.

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