The best ways to invest your lump sum wisely (2024)

Howeveryou comeintoalumpsum ofmoney,you’ll need to decide how best to use it.

Whether you want to use it to buy a house, put it towards your children’s education, or even simplysave itforthefuture, there area number of lump sum saving and investment options immediately available to you.

Thankfully, we’re on hand to breakthings down, so here is our guide on how to spend a lump sum wisely.

What is a lump sum?

You can come across a financial windfall when one or more of your sources of income, or another source altogether, pays a large single sum of money to you.

This could come from winning the lottery, inheriting, a redundancy payment or drawing on your pension, for example.

Lump sums differ from other ways of saving.

While some savings willoffergradual returns, lump sums are larger amounts that can collectively earn a lot more interest.

This means that with the right saving strategy, not only will you be able to put your lump sum towards your priorities,butyou will alsobenefit from theadditional interest.

How to prioritise your lump sum?

Everyone’s financial situation is different, meaning thatdecidinghow to use your lump sum ultimately rests with you.

Thedecisionwill depend on the size of your windfall,personal circ*mstances, and how muchrisk you want to take on.

If you have around £10,000, are lookingto save towards your retirementand prefer to save your money with little risk attached, you may prefer to keep your money in a savings account.

If you have a larger amount and don’t mind taking on a little more risk, you mayachievebetter returns investing your money directly.

Repayingdebts

One of the biggest priorities many peoplehaveis paying off debts of various kinds.

Some debts, such as credit card debt, can quickly begin to multiply when not repaidon time, so oftentimes, thefirst priorityis to resolve any outstanding payments that you may have.

If you’re looking totake control of things like credit card debt, lump sums can go a long way towards improving your financial situationand relievinga lot of stress.

How to invest a lump sum

Investingalump sum isone of the more popular ways for people who are more comfortable with higher levels of risk to invest larger amounts of money.

Higher risk means your chances of greater profits are also higher, so risk isn’t always a bad thing.

It’s important to only invest amounts of money you are comfortable with, andinto investments that you are confident of.To understand moreabout investing money, you should speak to an adviser.

While the top savings accounts currently beat inflation, many people instead choose to invest in stocks, shares and potentially bonds as abetter way to generate higher returns.

Each different investment you make will have a different level of risk, and your returns will varyas a result.

Butas a general rule,wait at least five years before taking out your lump sum, as this allows savings to build,interest to accrue, and your investment time torecover any losses it may have incurred.

Regardless of what you choose to invest in, there are some effective ways to reduceyour risk.

As thereare different kinds of risk,it’s important to understand what potential downsides there are to each investment.

But if you come into a large financial windfall, you may want to split this sum into two halves, with one part invested into stocks and shares and the other into a safer savings account.

Learn more: what is CFD trading?

Build emergency savings

Howeveryou choose to invest your lump sum, it may also be a good idea to build an emergency savings pot.

Typically, an emergency savings pot should cover about three months' salary and be quickly accessible so that you can use it whenever you need it.

These kinds of savings will cover you in case of unforeseen circ*mstances, such as redundancy or illness.

Always check with your employerabout itsworkplace illness policyand the eligibilitycriteria, buthaving emergency savings to support you in times of need will give you a little more peace of mind.

Saving with a savings account

If your lump sum is a smaller amount or you would prefer to save your money towards certain priorities,a simple savings account might be the better option for you.

Cash savingsare always popular with people who want to put away a lump sum and earn interest over a long period of time.

This can be a very good way to save for things without taking on bigger levels ofrisk. Savings accounts are much safer, buthow much interest you earn will come down toyourbank’s interest rate.

Saving with an ISA

Individual savings accounts(ISAs)are a particularly good way to savetowards ahouse purchase or retirement, or– with someparticularISAs– yourchildren’s future.

There area number ofdifferent ISAsavailablefor different savings purposes,and eachcaninvolvedifferent kinds offinancialproducts and savings amounts.

You could put your lump sum into an individual cash ISA, where you canearn tax-free interest onup to£20,000.

If you’re looking to save towards your first house, you could also considera lifetime ISA.

These ISAs allow you to put up to £4,000a yearinto a savings account, with a limit of £20,000.

LifetimeISAs were introduced with the explicit intention of helping18-40-year-oldssave towards their first homes.

So,if buying a house is your goal,this typeof ISAisa good option. There are alsojunior ISAsthat can helpwithsavingmoneytowards your children’s future.

TheseISAs let you save up to£9,000 a yearand canbe only withdrawn oncethe children are over 18.

If you're looking at making potentially larger gains (but at an increased risk), you could also consider .

Whether you’re looking to invest or save your lump sum,having a financial windfall at your disposal can helppay back debts,buy yourfirst house or save for your children’s future.

Investing, saving andbuilding for your future is important, so it’s vital thatas you’re makingdecisions about your financial future, you have the right advice.

Foryourexpert financial adviser,trustUnbiased.