Make Sure the Money Is Genuinely Spare
Having money left in your current account at the end of the month can give you useful choices. You might decide to build savings, prepare for future expenses, repay debt, work towards a financial goal or simply keep some of the money available to spend.
Before deciding what to do with it, however, it is worth checking that the money is genuinely left over. A positive bank balance does not necessarily mean that every pound is available to use elsewhere.
Some expenses arrive less frequently than your normal monthly bills. Car servicing, annual insurance, birthdays, Christmas, home maintenance and subscriptions paid yearly are examples of costs that can be easy to overlook when thinking about a typical month.
If you know these expenses are coming but have not allowed for them, some of the apparent surplus may already have a future job. Looking beyond a single month’s spending can therefore give you a more realistic picture of how much money is actually available.
Deal With Financial Problems That Need Attention
Once you know that money is genuinely available, the next question is whether there is anything more urgent that needs it.
This is particularly important if required payments are being missed or you have debts or bills where non-payment could have serious consequences. In those circumstances, deciding whether to save for a holiday, house deposit or another optional goal may not be the immediate financial priority.
This does not mean that having debt automatically makes saving inappropriate. Maintaining some accessible savings can still be useful, and the balance between saving and making additional debt repayments depends on the circumstances. Should You Save or Pay Off Debt First? looks at that decision in more detail.
Set Money Aside for Costs That Are Coming
If there are no immediate financial problems to deal with, consider the expenses that do not appear in your normal monthly spending but are reasonably predictable.
These are different from emergencies. If you know that an insurance renewal is due, your car will need servicing or another significant expense is approaching, you can prepare for it before the payment becomes due.
Money set aside gradually for a known future expense is sometimes described as a sinking fund. The money does not necessarily need to be kept in a completely separate account, but separating it mentally or through savings pots can make it easier to avoid spending money that will be needed later.
Accounting for predictable costs can also reduce the risk of using emergency savings for something that was actually foreseeable.
Build Financial Breathing Room
Once known expenses have been allowed for, building accessible emergency savings can be another useful destination for money left over each month.
An emergency fund is intended to help with costs or financial shocks that you could not reasonably plan for. This might include an urgent household repair, an unexpected car problem or a temporary interruption to income.
Having some money available for these situations can provide financial breathing room. Without it, an unexpected expense may have to be covered from money intended for another goal or through borrowing.
There is no need to turn this section into a fixed rule about how large your emergency fund must be. The appropriate amount depends on factors such as essential spending, income stability and household circumstances. How Much Emergency Savings Should You Have? explains how to think about the size of that reserve.
Decide Which Other Goals Deserve the Money
After immediate problems, foreseeable costs and emergency resilience have been considered, there may still be several useful things you could do with the remaining money.
The right choice is not necessarily the same every month or for every person. What matters is understanding what each use of the money is intended to achieve.
Additional repayments may reduce future interest or help clear a debt sooner, depending on the type of borrowing and any repayment terms.
Money can be directed towards a defined short-term goal, a known future purchase or a larger savings target.
Money that will not be needed for a long time raises different questions about whether continuing to hold it entirely in cash is appropriate for its purpose.
Different jobs for money left over
Reduce debt
Build savings
Prepare for longer-term goals
If several savings goals are competing for the same money, it can help to consider their deadlines and what would happen if each one were delayed. How to Decide What to Save for First explains how urgency, consequences and timescale can help you establish an order.
You also do not necessarily have to choose only one goal. Some people may prefer to concentrate their available money on the most pressing objective, while others may have good reasons to allow several goals to progress together.
Think Differently About Money You Won’t Need for Years
The length of time before you expect to need the money can become increasingly important once shorter-term financial needs are reasonably covered.
Money that may be required soon generally needs to remain accessible and should not normally be exposed to the possibility of a significant fall in value just before it is needed. This is one reason savings can be appropriate for emergencies, planned expenses and shorter-term goals.
Money intended for a goal many years away raises a different question. Keeping cash provides accessibility and avoids investment market fluctuations, but inflation can reduce its spending power over time. Investing offers the possibility of higher long-term returns but also introduces the risk of losing money, and returns are not guaranteed.
This does not mean that reaching a particular savings balance automatically means the rest should be invested. The purpose and timescale of the money still matter. Should You Save Before You Start Investing? explores the financial foundations that may be worth considering before making that decision.
You Don’t Have to Save Every Pound Left Over
Managing money sensibly does not require every pound of monthly surplus to be saved, invested or used to repay debt.
Once your required spending has been covered and you are making reasonable provision for financial priorities, some money can deliberately be available for things you enjoy. Eating out, hobbies, entertainment, travel and other discretionary spending can all be legitimate parts of a budget.
The useful distinction is between deliberate spending and simply spending whatever happens to remain in your account. Deciding in advance that some of your money is available to enjoy gives that money a purpose in the same way as deciding that another part is for savings.
Trying to direct every spare pound towards a financial target can also make a budget difficult to maintain. A plan that allows for both future priorities and present-day spending may be more practical than one that assumes all discretionary spending should be eliminated.
Give Your Monthly Surplus a Simple Order
You do not need a complicated formula or a fixed percentage for every possible use of your money. A simple sequence can help you work out what currently deserves attention.
The result does not need to be the same allocation every month. One month may require more money to be set aside for an approaching annual expense, while another may leave considerably more available for a savings goal.
If saving becomes a regular destination for part of the surplus, How Much Should You Save Each Month? can help you think about an appropriate contribution rather than assuming there is one percentage everyone should follow.
Review the Split as Your Finances Change
The way you use money left over each month should be able to change with your finances.
Once a known expense has been fully funded, the money previously directed towards it becomes available for another purpose. Paying off a debt can have a similar effect because money that previously went towards repayments may become part of your future monthly surplus.
Your priorities can move in the other direction too. A change in income, higher essential costs or the use of part of your emergency fund may mean that rebuilding accessible savings deserves more attention for a while.
You may also reach a point where several short-term savings needs have been covered and more of your money is intended for goals further into the future. That can change the questions you need to ask about where the money is held.
Reviewing the allocation occasionally helps ensure that your monthly surplus continues to reflect your current circumstances rather than a decision made when your finances looked different.
Conclusion
Money left over each month is useful because it gives you choices. Before deciding what to do with it, make sure it is genuinely spare by allowing for irregular expenses and other costs that have not yet reached your bank account.
From there, consider urgent financial problems, known upcoming costs, emergency resilience and your other financial goals. Money that will not be needed for years may raise different questions from money required in the near future, while some surplus can also be deliberately available to spend and enjoy.
The objective is not necessarily to save every pound. It is to give the money a purpose so that the way you use it reflects both your current financial needs and what you want your money to achieve in the future.
