If you’ve suddenly found that you have a spare £1,000, it can be tempting to go and spend it immediately. However, the chances are that’s probably not the best financial move in the long run. In all likelihood, there are much better uses for that money that don’t involve a new iPhone or a 60-inch TV.
Here’s a look at three smart things you could do to really make the most of that cash.
Open a Lifetime ISA
If you’re aged between 18 and 39, it could be worth putting that £1,000 into a Lifetime ISA. Why? Because the government will hand you a 25% bonus on your cash, taking your savings to £1,250 almost instantly.
Of course, there is a catch, and the conditions are that the money must be kept in the Lifetime ISA until you use the funds to buy your first property or you turn 60. A little inflexible, sure, but possibly also worth it if you’re saving for your first property or looking to turbo-charge your retirement savings over the long term.
Buy a mutual fund
Mutual funds can be a great way of investing in a stock market if you don’t know much about investing. With this kind of fund, your money is pooled together with the money of thousands of other investors and then managed by a professional fund manager.
There are all kinds of mutual funds available, ranging from basic funds that invest in well-known UK companies, to more specialised ones that invest internationally or in niche areas such as technology. If you’re looking for ideas, it’s worth checking out the list of most popular funds on Hargreaves Lansdown to see where other investors are investing their money.
Two funds on the most popular list that I hold in high regard include the Lindsell Train UK Equity fund, which invests in a selection of high-quality UK stocks, and the Fundsmith Equity fund, which invests in a selection of international stocks. Over the last five years, these funds have generated amazing returns of 88% and 156% for investors respectively, although past performance is no guarantee of future performance.
Buy a dividend stock
Another option, if you’re feeling adventurous, is to pick stocks yourself and buy a dividend stock. The advantage of these is that they pay you cash every year for doing absolutely nothing. Build up a portfolio of dividend stocks, and you could create a nice little second income stream for yourself.
The UK is home to a number of stocks that pay high dividends, with plenty of companies offering yields of 5% or higher. For example, oil giant Royal Dutch Shell currently has a dividend yield of 5.2%. That means that if you were to invest £1,000 in the company, you’d receive a cash payment of £52 per year, assuming the dividend and exchange rates are held constant. Of course, shares are riskier than cash savings and it’s important to realise that the value of your investment could fall.
When you find yourself with a little bit of excess cash it can be tempting to spend that money immediately. However, think long term, and you could use that money to potentially set yourself up for life.
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Edward Sheldon owns shares in Royal Dutch Shell. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.