Let’s say you’re lucky enough to have £1,000 at your disposal. Don’t just blow it, instead you should aim to put it to work. So what should you do with it?
Reduce debt first
If you’ve got expensive debts, such as a credit card charging 20% a year, a store card charging 30%, or heaven forbid, a payday loan, the answer is easy. Use your £1k to pay that down, because you will struggle to generate that level of return.
If your debts are under control, you should look to invest your money somewhere that will increase its value over time.
What you shouldn’t do is leave your money in a savings account or Cash ISA for the longer term, as these days you will get a near-zero return. In real terms, it will fall in value, after inflation. Instead, I would recommend investing it in the stock market, using your annual tax-free Stocks and Shares ISA allowance. That way you can take all your capital growth and dividend income free of tax, for life.
Go for stocks and shares
The simplest way to invest £1,000 is to buy a low-cost exchange traded fund (ETF) tracking one of the UK’s main indices, such as the FTSE 100 or FTSE 250. ETF providers iShares and Vanguard both offer low-cost options, or you could try an ETF tracking the FTSE All-Share, to give you the widest possible exposure to UK listed shares.
The attraction of index-tracking funds is that you do not have to worry about stock selection or market timing, you simply invest your money, and leave it there for years or decades. The low charges, which can be as little as 0.07% a year, mean you get to keep more of the share price growth and dividend income for yourself.
Trackers are a good building block for your portfolio, but you shouldn’t just invest in the UK. Over time, you could add to these funds, by investing in the US via an ETF tracking the S&P 500, for example. Or by an actively managed fund that puts money into a global pool of stocks and shares, such as Scottish Mortgage Investment Trust, or maybe Fundsmith Equity, run by the country’s most popular fund manager, Terry Smith.
Turn your tiny acorn into big money
Your £1,000 should only be the start. You should add to it if you can, investing it in a spread of funds and individual equities as well.
Buying individual stocks can really turbo-charge your returns. There are five top UK stocks to consider, listed at the bottom of this article. Invest using an online broker to save money, as these have the lowest charges on the market, and there are several good ones to choose from.
As you get used to investing, and comfortable placing your own stock trades, you can start to build serious money.
Over time, you could even build a £1m portfolio. Your £1k is only the start.
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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.