If you are fortunate enough to have savings, then it’s important to use it to best effect. Paying down your mortgage is one option, but there are others you should consider first.
Building up an emergency fund
Emergency funds (or “cash cushions”) are handy at the best of times. Right now, they may literally end up being a lifeline. If you only have limited savings then your best option by far may be to leave them as a cash deposit you can access if you need it. In fact, you may want to build up that pile of cash rather than pay off your mortgage.
Even if you’re earning less in interest on your cash balance than you’re paying in interest on your mortgage, there is still a meaningful value in having cash savings. The value is basically a certain level of “self-insurance”. In other words, it’s the knowledge that you can deal with life’s slings and arrows without having to rely on getting financing.
Increasing your insurance coverage
This is essentially the same idea but from a slightly different perspective. With COVID19 yet to be brought under control and Brexit on the way, now could be an excellent time to review your insurance cover. In addition to thinking about cover for your belongings, you might want to think about cover for your income, your health and your pets’ health.
You might also want to consider whether or not any of your possessions or activities could open you up to legal risk. Pets and bicycles are definitely worth a thought here. If so, it could be worth getting insurance to protect against this. Even if the possibility of it happening is low, legal bills, like medical bills, can be high. This can justify the cost of insurance.
Paying off higher-interest debt
Your mortgage may be your biggest, single debt but it may not be the one with the highest interest rate. If you have savings and are fully insured, then it may be best to prioritize paying off credit and store cards and personal loans.
Investing in the stock market
If you’re really confident that you can live without the money, then you may want to consider putting it into the stock market. There is no “right or wrong” about this, just what works for you. Essentially, you need to think about your skill and confidence as an investor and decide whether or not your investment returns would beat the savings made by reducing your mortgage.
Investing in your home
This may seem like an odd suggestion, but if you’ve been thinking of making updates to your house, then now may be the time to do it. Not to put too fine a point on the matter, if lockdowns continue into 2021, you may be spending a lot more time at home than you’d have liked. If so then you might want to prioritize anything which improves the time you spend in it.
That said, you may want to think carefully about making any significant upgrades if you’re thinking about moving. Even if they add value to your home, they may not add enough value to justify the initial outlay.
Investing in yourself
This may seem like an even odder suggestion, but it is worth considering. In blunt terms, take a look at your current income stream and the skill-set that generates it. Think about how robust or vulnerable that income stream is. Then think about what that means in terms of making sure that you can maintain or even improve your income in 2021 and beyond.
Depending on your situation, this could mean anything from developing existing skills to learning new ones to starting a new business or side-hustle. The key point is to think ahead about what life might throw at you and do your best to prepare for it.
Your property may be repossessed if you do not keep up repayments on your mortgage.
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