Do you have ‘forced savings’, and if so what should you do with them?

With the newspapers full of articles about the rising cost of living, it’s easy to get depressed about the state of our finances.

But some households are still benefitting from a period during the start of the Covid pandemic when they were struggling to spend, and it has left them with savings to spare.

Figures from the Government’s Office for National Statistics show that many of these ‘forced savers’ may have bigger nest eggs than ever before, but may be struggling to know how best to deal with them.

All cashed up, but nowhere to go

The Government figures show that we saved more than ever before during the pandemic – at its peak (April to June 2020) we saved almost a quarter, or 24 per cent of all of our household resources.

But the statisticians believe that three quarters of those savings were ‘forced’ – ie we put our money into our bank accounts because there was nowhere else to spend it because of the lockdown.

But some of us were bitten by a ‘saving bug’ too, with the remaining quarter of the savings increase attributed to factors such as wanting to prepare for coming uncertainty.

The seven-thousand-pound question

In total, the extra savings made during the pandemic amount to around £7,000 per household. And although the rate at which we are saving has since dropped dramatically, many families still have more than usual tucked away.

The question now is: where is all that money going to go?1

Here are some suggestions.

  • To deal with the rising cost of living

For many households, the sensation of feeling richer will not last long. Inflation is running at nine per cent, and soaring energy and food bills may take the lion’s share of that carefully hoarded cash.

  • Eroded away by inflation

When inflation is high, but interest rates still relatively low, keeping a cash pot of savings may give you some security, but there is a sting in the tail. Over time, the value of that money will fall. If inflation continues at nine per cent, the value of £7000 of savings will be worth £6,370 in real terms after twelve months2, assuming you are not receiving any interest on your money. After just over seven years, if inflation continued at its current rate, your money would buy just half of what it buys today.

  • Used for post-pandemic spending sprees

During the pandemic, some spends were merely deferred, rather than avoided altogether. Once-in-a-lifetime holidays, weddings and other planned occasions are likely to still go ahead, and may cost more due to inflation.

Those who return to their post-pandemic entertaining and travel habits may find that the money disappears very fast indeed.

  • Used to increase financial resilience

An optimist might suggest that the extra cash we’ve stashed away could be used to benefit us long term. There are plenty of ways to do this, from investing in stocks that will pay long-term dividends to buying protection policies that will pay out if we suddenly find we are unable to work due to illness or to protect our families in the event of an unexpected bereavement. Some may also use the money to pay down debt.

A once-in-a-lifetime opportunity

For those who have ‘forced savings’ and are otherwise reasonably financially secure, the extra money should be seen as a once-in-a-lifetime opportunity to create a financial plan that works for the future.

Ensuring that your money is not eroded by inflation should be the first priority, with only the amount that you need in instant access savings accounts and the rest tucked away somewhere where you can get a better rate.

Dealing with any expensive debt should also be a priority. Those in this situation should look at paying off the high-interest rate debts first, followed by any others. Overpaying a mortgage may also be a possibility depending on the rate you are paying and whether you are penalised for doing this.

Next, it can be used to make progress towards financial goals for the future, whether that is a pension for retirement, or savings for a family member’s university fees or house deposit.

If you aren’t sure how to make the most of ‘forced savings’ then a financial advisor or wealth planner can help you to take a holistic view and could encourage you to keep adding to them, creating even more resilience for your family.