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

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If you have £500 to save this payday, that’s excellent news. But what should you do with it?

Luckily, there are plenty of options for savers and investors who want to get their money working as hard as possible.

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Here’s a look at three brilliant financial moves you could make with a payday lump sum of £500 today.

LISA

If you’re saving for retirement or your first property and aged between 18 and 40 putting your payday funds into a Lifetime ISA could be a brilliant move.

The biggest advantage of this product is the fact that any capital gains or income on funds in the wrapper are sheltered from the taxman.

You’ll also receive a generous 25% top-up from the government on all your contributions up to £4,000 per year. So, on a deposit of £500, the government will add £125.

As long as your ISA provider allows it, this type of ISA also enables you to hold a broad range of stocks and funds. That could help you grow your money faster over the long run.

The one drawback of using this saving product is that you can’t access your money until you either turn 60 or buy your first property. If you try to withdraw funds for another reason, you’ll have to pay a penalty of 25%.

Stocks and Shares ISA

If you can’t open a LISA or don’t want to lock your money away, a regular Stocks and Shares ISA is a great alternative for payday funds. 

You won’t get the 25% government top up with this ISA, but the tax perks are still available. That makes it an excellent account for long term investing. You can own any stock or bond as long as it’s traded on a “recognised exchange.” That effectively means any developed economy stock market.

Payday investing

You don’t have to open a Stocks and Shares ISA or LISA if you want to invest for the future. You could also use your payday funds to set up a regular investing plan with an online stockbroker.

Most online stock brokers will let you save every month with as little as £50 although some require a large lump sum to start.

Investing in the stock market is a great way to grow your wealth over the long term. The best way to make the most of the market’s wealth-creating potential with just £500 is to buy a low-cost tracker fund.

These funds track the market for you, so you don’t have to worry about picking individual equities.

The returns can be fantastic. For example, for the three-and-a-half decades to the beginning of March 2020, the FTSE 250 produced an annualised return for investors of around 12%. At this rate of return, your money would double once every six years.

Combining a low-cost investment fund with tax-efficient products such as a LISA can be an extremely potent combination. A deposit of £500 with the government top-up would be worth £2,000 after 10 years, assuming a 12% annual rate of return. Imagine what it would be worth if you invested regularly!

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Rupert Hargreaves owns no share 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.

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