Commonwealth Bank has reported that the total balance in savings accounts and term deposits has actually risen by 5 percent over January to July 2020. Total household income grew by 11 percent a year between January and August 21 2020.^[1] While wages haven’t increased significantly, government benefits have helped. Combined with lower spending over the same period, and many households are saving more than ever before.

So, should you be holding onto those savings? Investing? Paying down debt? What is the most financially savvy option if you have unexpected savings?

Of course the answer to how to spend any additional savings isn’t cut and dry. It will completely depend on your income, job security, amount of savings, amount of debt and much more. It’s best to seek advice from your financial planner on your financial situation. Here are some of the options they may recommend for you.

Hold onto those savings

If you don’t have a significant amount in savings, then holding onto those savings to provide an emergency fund may make sense. An emergency fund is designed to safeguard you should the unexpected happen such as losing your job, suddenly needing to repair something in your home or car, or coping with an unexpected illness.

There is no fixed dollar amount that should be in your emergency fund, it really depends on your expenses and income. A good rule of thumb is to have around at least three to six months of expenses covered in your emergency fund; however, it really comes down to what you’re comfortable with. If you personally feel more comfortable having a year’s worth of income in savings just in case and can afford it, go for it. If you’re comfortable having two months of expenses covered but have options to cut your expenses, liquidate investments or access other funds from family members on short notice, then that’s your choice.

Just remember that any savings you do put away act like an insurance policy, not an investment strategy. With interest rates so low at the moment, anything in a savings account will only generate a very small return.

Pay down debt

If you have a lot of debt, especially debt with a high interest rate such as credit card debt, car loan debt or personal loan debt, paying down some of this debt is a good choice. In most cases, you will be significantly better off in the long term by reducing (and eventually paying off) the expensive interest repayments.

When it comes to paying down your mortgage, this may also be a good choice. This will depend on your interest rate, loan term, how much you’ve paid down already, how much equity is in the property and your plans for the property in the short, mid and long term. Talk to your financial planner about whether this is the right option for you.

Invest

If you have available funds to invest and the cash flow to service any debt, investing can be a good option.

Investing during a recession can provide an opportunity to find discounted or bargain investments with long-term potential. Good options can include blue-chip shares or property. There will always be a certain level of risk, especially when trying to land a bargain, so it’s best to know this upfront and seek out opportunities which you anticipate will pay off in the long term.

Do your research and due diligence on each investment to make sure it’s right for your personal investment strategy. Talk to your financial planner to see how any potential investment will fit into your broader strategy.

Contribute to your super

Depending on your circumstances and how close to retirement you are, contributing additional funds to your super may be a good idea. This can be a tax-efficient option which helps to build savings for your retirement, but it can also lock away money which may be better utilised elsewhere in the short to medium term. Make sure you speak with both your accountant and financial planner to assess your particular situation.

Invest in yourself

It’s been a tough year and most of us are feeling the impacts, if not financially, then probably mentally. If you’re able to afford it, an investment in your own happiness, wellbeing and mental health can give you a real boost. This could be anything from a bottle of wine, a nice dinner out, a spa treatment, a holiday, a renovation, a piece of furniture or even a good book. The best thing about building wealth is that it allows you to create the life you want and to spend on the things and experiences that you value most. It’s important not to lose sight of that, even when times are tough.

David Hancock is a director and senior financial planner at Montara Wealth.