Christmas is right around the corner, and whether you’re celebrating with family up close or from afar, there are probably gifts involved. Though knowing what to gift to those closest to you isn’t always easy, it can be just as hard to know what you want to receive.
You might think that asking for money is boring, but the Independent report that cash and gift cards are the most sought-after presents for Christmas this year. More than a quarter of those who took part in the YouGov survey selected the option, with clothing coming in second place.
But what responsible things can you do with your Christmas cash gifts that don’t involve immediately treating yourself? Read on to find out.
1. Help pay off any loans or debt
Christmas is an expensive time of year, and 2021 hasn’t exactly been easy from a financial standpoint either. Perhaps you have long-standing loans that you need to repay, or an outstanding balance on your credit card?
Using any extra money that you may receive at Christmas to help pay off such debts could significantly help your finances over the long term. This is because loans and credit card debt accrue interest which can become significant over time.
Consider paying off high interest debt first, such as your credit card, since a higher interest rate can mean the amount you owe grows faster.
One loan you might consider paying off is your mortgage
If you don’t have any urgent loans, it may be worth tackling what is likely the largest financial commitment of your life: your mortgage.
If you pay extra to your mortgage, you can reduce the interest you pay, and you might even be able to pay off the debt early. Clearing your mortgage can feel liberating, bringing you financial peace of mind and a greater sense of freedom and confidence in your money, as you no longer need to worry about large monthly payments.
Most mortgages let you overpay by 10% of the remaining balance each year without triggering early repayment charges, though this is not always the case. Be sure to understand the rules surrounding overpayment on your specific mortgage deal before committing.
2. Make additional pension contributions
Sometimes your pension can feel a lifetime away, particularly if you’re at the start of your career. However, by making additional contributions as early as possible, you could make your retirement significantly more comfortable.
Your pension benefits from compound returns, meaning that any returns you make can also generate returns. The earlier you start your contributions, the more time your pension has to benefit from compound returns, and the larger your pension pot could end up.
Plus, pension contributions also attract generous tax relief. For basic-rate taxpayers, this stands at 20%, meaning that a £100 pension contribution would only cost you £80. For higher- and additional-rate taxpayers, this tax relief stands at 40% and 45% respectively.
Lastly, if you are a member of your workplace pension scheme, your employer is also likely to be contributing to your pension. Auto-enrolment rules mean that you contribute 4% of your earnings into your pension, your employer contributes 3%, and you receive 1% as tax relief.
If you increase your monthly pension contributions, your employer may match it, and increase the amount they pay into your pension too.
It is worth noting that if you do add to your pension, this money will typically not be accessible until you turn 55 (57 from 2028), so you will be committing that money for a long time. For shorter-term goals, you may want to consider investing.
3. Invest for the future
Interest rates have been low for years, so saving your money in bank accounts is not as rewarding as it once was. With inflation on the rise too, a more effective method of building wealth may be to invest.
Investing offers the potential for your money to grow but is typically a riskier strategy than keeping your money stored in a bank account. Experts tend to recommend leaving an investment for a minimum of five years to give the money ample opportunity to grow.
There are several ways to start investing, but a Stocks and Shares (S&S) ISA might be worth considering first. This is because ISAs are a tax-efficient method of investing since you won’t pay Income Tax or Capital Gains Tax on any returns.
You can normally open an ISA with as little as £100, so your Christmas cash could kick-start a healthy savings habit.
Get in touch
Before making any decisions about investing, speak to a financial planner.
If you are looking to start investing or you’d like to review your current investments, email firstname.lastname@example.org or call 0115 933 8433.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.