What to do with money

If you have an unexpected lump sum, for example from an inheritance or a redundancy, you may be wondering what to do with your money.

Whether you want to save for your future, invest in the stock market, or go on holiday, here are some common potential options.

With so many options to choose from, deciding what to do with your money can be daunting. Starting with the basics can help. There are five main things you can do with your spare cash:

1. Spend it
2. Save it
3. Invest it
4. Give it away
5. Pay off debts

Let’s look at each of these options in a bit more detail.

If you’ve come into some extra cash, treating yourself to something that brings you joy can be rewarding. Whether it’s a new gadget, clothes, or something you’ve had your eye on for a while, doing a bit of research to find the best price can help you get the most value for your money.

Spending on experiences can be fulfilling too. Imagine a memorable trip, a new hobby, a course you’re interested in, or a special activity you’ve always wanted to try. These kinds of experiences often create cherished memories that you can look back on for years to come.

Putting extra money into savings can help you build a financial safety net for emergencies and work towards your savings goals. Exploring different options beyond the high-street banks can help you find a savings account with features to suit you. From easy access accounts to fixed rate bonds, take the time to research where to put your savings.

If you’re comfortable with the risk of market fluctuations, investing your spare cash can potentially grow your money over time. In the UK, investors have several options, including buying shares in companies, investing in bonds, purchasing property, or even exploring alternative investments like art or precious metals. However, the value of your investments can go up or down, and there’s no guarantee you’ll make a profit.

Donating to charities or causes you care about can be a thoughtful way to use your spare cash. Even small contributions can make a difference. Giving to those in need or supporting causes you’re passionate about brings its own rewards.

Dealing with debt can feel difficult, especially when you’re trying to save for something meaningful. If you’ve got spare cash, using it to reduce high-interest debt like credit cards or personal loans can give you a clean slate. While it might seem like you’re not getting anything tangible in return, the peace of mind from knowing you’re working towards being debt-free could be worth it, and you’ll have more disposable income in future.

Should I pay off debt or save first?

Deciding whether to pay off debt or build a savings pot can be difficult. Some people might focus on high-interest debts, such as loans and credit cards, because the interest charges on these can be higher than you would earn on savings or investments. Reducing debt can also relieve financial stress and may have a positive impact on credit scores. Read more on how to pay off credit card debt.

Saving is generally viewed as the lower risk option of the two. Accounts from UK-authorised banks and building societies are typically covered by the Financial Services Compensation Scheme (FSCS), which protects eligible deposits up to £120,000 per person and per bank. However, the interest you earn can be limited and the real value of your return can be impacted by inflation.

Investing, by contrast, typically leaves your money vulnerable to the ups and downs of the markets, and the value of investments can rise or fall. Some investors might be happy to accept greater uncertainty for the potential of higher long-term growth. However, there is always the risk of losses.

For some people, saving and investing serve different purposes at the same time:

• Saving is often used for short-term goals or building a cash buffer
• Investing is usually associated with longer-term goals of five to 10 years or more

If you’re wondering what to do with money sitting in the bank, the following are some popular savings accounts and investment options for putting extra cash to work.

Fixed rate bonds let you lock away a lump sum of money for a set period – usually anywhere from six months to five years. Because the interest rate is fixed upfront, you can calculate the interest the bond offers for the duration of the term. This certainty may appeal to savers who prefer predictable returns at times of economic instability.

Bear in mind, however, that fixed rate bonds are generally only considered low risk if they’re protected by the Financial Services Compensation Scheme (FSCS). Not all accounts are covered, so check a provider’s protection status before opening an account.

A notice account offers the flexibility to withdraw your money once you’ve given a certain amount of notice – often 30, 60, or 90 days, though some require 120. Notice accounts strike a balance between easy access accounts and fixed rate bonds. They offer variable interest rates that can be more competitive than typical easy access options, while still offering more flexibility than locking money away for a fixed term.

Easy access savings accounts allow you to take money out whenever you choose, so they’re often chosen by people who want maximum flexibility. Because there’s no long-term commitment, these accounts can suit situations where you want to earn some interest but might need quick access to your money.

Cash ISAs are a type of individual savings account that let you save money tax-free, up to an annual limit of £20,000. From 2027, this limit is set to reduce to £12,000 for those under 65.

There are four types of cash ISA:

• Instant access cash ISAs: Pay in or withdraw money whenever you like, usually without penalties
• Regular saver ISAs: Deposit a set amount each month to receive a fixed rate
• Fixed rate cash ISAs: Lock your money away for a set term in return for a fixed, often more competitive rate
• Notice ISAs: Save money and give notice before withdrawing it to access rates that are often higher than those on an instant access ISA

If you’re aged between 18 and 40 and wondering what to do with your money, you might consider a lifetime ISA. Lifetime ISAs are intended to help you either buy your first home or save for retirement. You can save up to £4,000 per tax year, and the government will then add 25% to your contributions – up to £1,000 per year. 

For example:

• Save £2,000: get a £500 bonus
• Save £4,000: get a £1,000 bonus

Investing in stocks and shares can offer higher returns. However, investing in the stock market is unpredictable and could put your capital at risk.

A stocks and shares ISA lets you invest in companies, government or corporate bonds, and investment funds, all within a tax-efficient wrapper. While this offers the potential for growth over the long term, the value of your investments can go down as well as up, and it’s possible to get back less than you originally put in.

When deciding what to do with money, consider whether you have a spare pot of cash in case of financial emergencies. Think of it as a safety net for life’s surprises. Maybe your car breaks down or the boiler needs repairing. An emergency fund (sometimes called a rainy day fund) is there to help prevent reliance on an overdraft or credit card when the unexpected happens.

The general rule of thumb is to save at least three months’ worth of outgoings. The exact amount will depend on:

• How much you spend each month
• How many people contribute to your household income
• The stability of your income

Read more information about how to build an emergency savings pot.

Not sure what to do with your money? Some people like to set aside money for specific savings goals. This could be saving for a wedding, a baby or a trip abroad. Having a clear savings goal can make it easier to decide what to do with your spare cash. 

Different types of savings accounts can suit different timelines. For short-term goals, easy access savings accounts offer flexibility to top up funds and withdraw as needed. Fixed rate bonds may work well for longer-term goals.

At Raisin UK, you can compare savings accounts from a variety of banks and building societies, making it easy to find an option to suit any savings target. Simply register for a free Raisin UK Account, apply to open an account, and deposit your funds.