What could you do with an extra £500 each month?

If you're fortunate enough to have a spare £500 each month – perhaps because of a job promotion, paying off a car loan or reduced childcare fees – you may be thinking about where to put your money.

Below we explore some of the options for different scenarios.

How recent graduates can boost their savings

You have recently graduated and landed a full-time job. You now get a regular pay cheque and are not relying on payment from a student loan that is paid once a term.

After rent, bills and living expenses, what could you do with any surplus cash?

If you're under 40 and thinking about buying your first home or saving for your future self by creating a pot that you can access when you're older, you may want to think about a stocks and shares Lifetime ISA (Opens in new window) You can put up to £4,000 in it each year up to age 50, and the government will add a 25% bonus, up to a maximum of £1,000 per year on top.

A stocks and shares Lifetime ISA may not be right for everyone, and tax rules may change in the future. If you need to withdraw the money before you’re 60, and it’s not for the purchase of a first home up to £450,000 or a terminal illness, you’ll pay a 25% government charge. So, you may get back less than you put in.

Budgeting may be something you are just getting to grips with. Our Chase current account lets you set a monthly spending budget for each of your current accounts. We also pay 1% cashback on your everyday debit card spending for your first 12 months for new customers. (Max £15 per month for applications from 9 May 2023. Cashback exceptions apply).

Make the most of lower childcare costs

You're in your mid-30s, and your children are now in school, so your childcare fees have reduced significantly. What could you consider doing with the extra money?

If you own a home, one option to consider is overpaying your mortgage. Interest rates have shot up in the last year. In late 2021 it was possible to find mortgage deals with interest rates below 1%. But now the average interest rate offered by lenders is generally between 4.23% and upwards of 7% – depending on how much you are borrowing as a percentage of the value of the property (your loan-to-value) and whether you're choosing a fixed or variable rate.

It's important to check if your mortgage allows overpayments without any penalties, some mortgages have no restrictions but others may apply extra charges for overpayments. For example, some lenders let you overpay by up to 10% per year of the outstanding balance without incurring any extra charges, but restrictions may apply, subject to each lender's specific conditions. Check with your lender if this is something you'd like to pursue.

Other options could include depositing your cash in a savings account or, if you don't plan on touching the money for a long time, paying more into your pension. You have to be sure that you're not going to need this money, as once it's in the pension, it may take many years to be able to access it.

Of course, if you have debt you'd like to clear, you may wish to seek independent financial advice to understand what's best for your circumstances.

The benefits of an emergency fund

This is a good option for people of all ages.

Have you got an easy-access pot of savings in place? This should be enough to cover your bills and expenses for three to four months if you suddenly find yourself out of work. You should also have some money set aside in case of emergencies, such as car repairs or a new boiler.

After your emergency fund is in place, it’s worth thinking about your long-term financial goals. When do you want to retire? How much will you need to cover your living expenses when you stop work? Will you get access to the full state pension?

Get your state pension forecast at gov.uk (Opens in new window) to see whether you have enough years of national insurance contributions. Then check your private pension savings and consider boosting your monthly contributionsto set up and stay on track with your goals. Remember, once your money's in your pension pot, it might be a long while before you can access it.

Should you top up your pension?

If you can afford it, it might be worth considering topping up any private pension (Opens in new window), as you may be thinking ahead to retirement. This can be more attractive to those who are over 50 and nearer to retirement.

You'll generally get income tax relief on money you put into a pension, which means you could effectively get a tax uplift on the value of your contribution, subject to any annual pension contribution limits. The tax relief you can receive is limited to your income from being employed or self-employed.

The amount of tax relief you can receive depends on your tax rate – basic-rate taxpayers can receive 20%, higher-rate taxpayers up to 40% and additional-rate taxpayers up to 45%. You may be able to claim a higher rate of tax relief (Opens in new window) if your income is between £100,000 (Opens in new window) and £125,140 or if you have children and earn more than £50,000.

The annual pension contribution limit on which pension tax relief is available was raised to £60,000 from 6 April 2023 (it used to be £40,000). Unused contributions below the limit in the previous three years can be carried forward. Gross pension contributions above that limit get no tax relief.

The UK government also abolished the Lifetime allowance from 6 April 2023.

If you're a keen investor but want some tax relief, there may be other options available; you can find out more by speaking with an independent financial adviser.

Pensionplans can generally be accessed from the age of 55, rising to 57 by 2028. You can still pay into a pension if you withdraw money from it, but only up to £10,000 a year from 6 April 2023 (£4,000 before then).

Recommended reading

• What's a good amount to have in savings?
• Setting realistic financial goals in your 20s and 30s
• Financial influencers and 'get rich quick' schemes

Disclaimer: This article is for information only and does not constitute financial or legal advice. Tax treatment depends on your individual circumstances and may be subject to change in the future. We do not offer any tax advice. Articles may reference products and services which Chase UK does not currently offer.

As with all investing, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest.

A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice.

Compared to a pension, the Lifetime ISA is treated differently for tax purposes. You may be better off contributing to a pension.

If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you may lose the benefits of the employer-matched contributions.

If you are unsure if a Lifetime ISA or a pension is the right choice for you, please seek financial advice.

Nutmeg is authorised and regulated by the FCA in relation to certain investment services and restricted advice only. Chase is a trading name of J.P. Morgan Europe Limited. Nutmeg and J.P. Morgan Europe Limited are J.P. Morgan companies. Products provided by Nutmeg are not guaranteed by Chase. Before applying, you should consider if a Nutmeg account and its features are suitable for you and your investment needs