COMMENT
Five Things To Do With A Windfall

It's January, traditionally a time for pay rises and bonuses. You may have received some money that you weren't expecting to (inheritance/gifts etc). If you are lucky enough to have come into a lump sum of money and are wondering what to do with it, here are five ways to use £5,000.

1. Reduce Your Debt

It's dull but so worthwhile.

There's no point having a savings account, even one earning 5%, if you have debt on credit cards/loans accruing interest at 10% plus! Paying off your expensive cards and loans should be your number one priority - just think about how pleased you'd be if you had no debt!

And anything left over could go into one of the following options:

2. Put It In Your Pension

Yes, the boring option - you don't want to wait until you're 65 to see it again. But there can be big advantages in using your pension allowance.

If you were to put that £5,000 into your pension, as a basic rate tax payer you would automatically get an extra £1,410 from the tax man. So your windfall is now worth £6,410. You'd get even more if you pay higher rate tax, as you get a refund from the tax man worth an additional £900.

If you are a member of a company scheme, you can pay an additional voluntary contribution, but first check to make sure these charges aren't too high.

3. Pay Off Your Mortgage

Provided your mortgage lender allows it without penalty, overpaying your mortgage is a great way to use a windfall. By reducing the interest payable you will lessen your term or reduce your monthly payments, and generally achieve a better return than you could by saving it as cash.

4. Save It

If you're likely to need your windfall within the next five years, or you don't have a rainy day account for emergencies already set up, putting your windfall in savings would be the most sensible option. There are some good rates of interest available (check out our Savings centre for accounts paying 5%+), but for tax-free returns remember you can save up to £3,000 a year in a mini cash ISA.

5. Invest It

Provided you can leave your money alone for at least five years, the stock market could be the way to go for better returns than a savings account. That doesn't have to mean buying and selling of shares – there are less scary methods, such as using an investment trust or an index tracker. These are simpler ways to invest in the stock market, with lower charges than most other forms of investments.

If you haven't already taken out an ISA this year, you could open a maxi share ISA with your £5,000, and you'd still be able to add up to £2,000 until April 5 if you wished. And if you have taken a mini cash ISA already, remember you can still take out a mini share ISA with up to £3,000. Have a look in our ISA centre to find out more.

Deciding what to do with a lump sum is a difficult decision, but if you can forgo the idea of blowing it all on a spending spree, you may find it satisfying to make that windfall even bigger!