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Have £500 to save this payday? Here are 3 smart moves you could make

If you have a little money to save this payday, that’s great news. But what do you do with it? Do you stick your savings in a high-interest savings account and settle for interest of around 1.5% per year? Do you put it in a Cash ISA? Or do you consider growth investments such as stocks and funds?

Ultimately, I don’t know anything about your savings goals, or risk tolerance, so I can’t help you make that decision. That said, if you’re saving for the long term, here’s a look at three really smart financial moves you could make.

Lifetime ISA

If you’re aged between 18 and 40 and you’re saving for retirement or your first property, one of the best financial moves you can make, in my view, is to put your money into a Lifetime ISA.

Why? Well not only are any capital gains or income sheltered from the taxman, but you’ll also receive a generous 25% top-up from the government on all your contributions up to £4,000 per year. In other words, put in £500, and the government will add another £125 for you. This type of ISA also enables you to hold a broad range of stocks and funds, meaning you could grow your money at a high rate over time.

Such a fantastic deal is not without a catch, however, and in this case, you can’t access your money (without harsh penalties) until you either turn 60 or buy your first property. Yet if you can look past these restrictions, you’ll see that the Lifetime ISA has a lot of appeal from a long-term savings perspective.

Stocks and Shares ISA

If you don’t qualify for the Lifetime ISA, or you don’t want to lock your money away until you’re 60 (or until you buy your first property), you may be more interested in a Stocks and Shares ISA. This is a more flexible savings vehicle that allows you to access your money at any time.

With this ISA, you won’t get the 25% top-ups from the government, but you will still get the tax perks, as all capital gains and income are tax-free here too. That makes it a great account for long-term investing as more money ends up in your pocket over time. Again, through this type of account you can access a broad range of stocks and funds.

World-class funds

But what do you invest in within one of the ISAs I’ve just mentioned? Well, assuming your investment horizon is long term, one option for those with £500 to hand would be to choose a fund. By investing this way, your money won’t be eroded by trading commissions in the way it would be if you decided to buy individual stocks (approx £10 per trade).

As for which funds to invest in, two of my favourites include the Lindsell Train Global Equity fund and the Fundsmith Equity fund, which you can find on the Hargreaves Lansdown platform. These are both global and managed by top-class portfolio managers who have excellent long term track records. Over the last five years, both have risen by more than 150%, although past performance is no guarantee of future performance.

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Edward Sheldon has a position in the Lindsell Train Global Equity fund and the Fundsmith Equity fund and owns shares in Hargreaves Lansdown. The Motley Fool UK has recommended Hargreaves Lansdown. 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.