What To Do With £50,000

Neil Faulkner
by Lovemoney Staff Neil Faulkner on 06 July 2006  |  Comments 0 comments

Just leaving all your savings in the bank is little better than hiding it under the floorboards. Here's what you should do with a modest pot of money.

What To Do With £50,000

Savings rates have hit rock bottom this year and there are few options around for generating any extra income. Many savers are turning towards investment to try and create some extra cash but there's also peer-to-peer lending on the cards.

 

Forget savings accounts

Firstly, our good Fool might get an instant access cash ISA, which is basically a tax-free savings account. This means that if the interest rate is 5%, he gets 5%, not just the 3 or 4% he'd get in a similar, boring savings account. He can put up to £3,000 in a cash ISA every year.

Next, he'd use a good old instant access savings account (or a brand new best buy one!). Yes it's taxed, but he can get much better interest rates than by just leaving his money in the bank. Let's say he puts £15,000 in a savings account, so he now has £18,000 in savings. If he earns £30,000 a year, that's 60% of his gross (i.e. before tax) salary stashed away.

That's a great safety net of cash, which he can get at in a hurry if needs be. Plus, as long as he keeps moving his funds to the accounts with the best interest rates, he should comfortably stay ahead of rising prices (inflation).

But will he ever, in all likelihood, need more than half his salary instantly? Probably not. What if he had a further £32,000, so a total £50,000, in savings? Simply leaving this money in cash is inefficient and wasteful. He should consider how to make his money make more money.

Sniff. My son's an investor!

His first step into the truly adult world might be to open a shares ISA. He can put up to £7,000 into one of these each tax year (although he can only put £4,000 in if he also opened a cash ISA in the same tax year). Share ISAs are free of capital gains tax, which means it doesn't matter how much the shares rise, he won't pay tax on it.

As this Fool is clearly a sensible saver, he'll want a low-risk investment. For this, he can't get better than an index-tracking ISA. These things track indices (it's all in the name) such as the FTSE 100 or the FTSE All-Share. As share dealing in index trackers is automated, they are usually very cheap. Plus they outperform funds managed by stupid humans 82% of the time! Fidelity has the cheapest index-tracker on the market, which he can find in our ISA centre.

There's no reason why he can't do this a few years in a row, making all his investments capital gains tax free!

Retire richer than your friends

As he doesn't need the money now, he could put some of it into a pension. The great news is he can get index-tracking pensions too! His first step should be to look at the funds offered to him by his company, as they probably match all or part of his contributions. If no such scheme is available, he should look online for index-tracking stakeholder pensions that have low total expense ration -- the administration costs. Less than 1% is good.

However, he should remember that investing is, in The Fool's opinion, a long-term endeavour. With index trackers we can expect our shares to do very well thank you over five plus years, but all markets fluctuate. If our hypothetical friend is saving up for something, or if he needs the money in less than five or so years, investing it probably isn't a good idea. If he needs the money before retirement, then investing it in a pension isn't a good idea at all! He probably won't be able to get at it till he's 50 or 55, and even then he won't get most of it as a lump sum. Oh, the ups and downs of investing!

More on savings and investments:

The best fixed-rate savings bonds

What is peer-to-peer (P2P) lending?

How to get higher investment returns with low risk

LendInvest: the first peer-to-peer mortgage lender

Nutmeg: An alternative way to invest your ISA

The cheapest investment platforms - rivals to Hargreaves Lansdown

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