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Don’t blow that PPI payout! Invest it in a Stocks and Shares ISA instead

PPI mis-selling is the UK’s biggest financial services scandal, with the total compensation bill set to top an incredible £50bn. This is terrible news for investors in the big banks, but great news for the millions who are still pocketing cash windfalls as we speak.

Autumn windfall

The average payout is £1,700 per person, with many getting a lot more than that. The last-minute rush to meet the final deadline for claims on 29 August has forced the big banks to set aside another £4.4bn to cover compensation.

This money will be hitting people’s bank accounts in the weeks ahead, just in time for a good old-fashioned Christmas splurge. However, I have a much better use for the money. Instead of spending it, you could invest it instead. And if you do that, your PPI payout could grow into something far bigger over time.

As Laura Suter, personal finance analyst at investment platform AJ Bell points out, your first step should be to pay off any pricey debt.

The average household has £2,608 of debt on their credit cards. With the average interest rate of 25%, that means many are paying large amounts of interest each month. “You could use the windfall to wipe out any debt and go into 2020 debt free,” Suter says.

Ready for a rainy day

Your next step is to build a pot of rainy day cash in your bank account, to cover unexpected expenses, such as car repairs or a broken boiler. But you do not want to leave it there for the longer run, because the best you can get with instant access is 1.45%. You can get a lot more than that via the stock market, provided you can stand a bit of short-term volatility along the way.

If you’re a novice, a simple place to start might be a FTSE 100 tracker Inside a Stocks and Shares ISA. This gives you a spread of top UK blue-chip companies, with a current yield of 4.53% a year.

Suter has calculated you could generate more than £1,000 from your £1,700 in just 10 years by investing inside an ISA. If your money grew at an average rate of 5% a year, after fees, you would have £2,769. If you hold it there for 20 years, it will have grown to £4,511. You might do a lot better than that.

Growth upon growth upon growth

The long-term average return on the FTSE 100 is 7% a year, and my calculations show if you achieve that, your £1,700 would be worth £3,344 after 10 years, and £6,578 after 10. If you keep it invested for 30 years, it would have grown to £12,940. Over 40 years, that’s a pretty meaty £25,457 accrued.

Now 40 years might sound like a long time to you, but that’s the length of time you should be saving for your retirement.

Even small sums will grow into something big, if you give them time. Alternatively, you could just splurge your PPI windfall in the weeks ahead, and have very little to show for it by the time 2020 swings round. It’s your call…

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Harvey Jones has no position in any of the shares mentioned. 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.