What To Do With A Windfall

If you find yourself in the fortunate position of having a lump sum to deal with, where should you start?

What would you do if you suddenly came in to a hefty sum of money? Great-Aunt Mabel dies leaving you £100,000, for example. Or you win half a million squids on the lottery. Or you sell your house in order to rent for a year or two and need to find somewhere for the dosh in the meantime.

Being landed with a large sum of money is not without its problems much as it is a happy situation to be in. My husband and I are finally in a position to sell a property we inherited some years ago, so at some point in the next couple of months a sizeable sum of money will land in our bank account.

Fabulous though that is, I don't mind telling you that I'm extremely nervous about what to do with it. We have vague plans to buy a plot of land and build our own house at some point but, essentially it's our big chance for long-term financial freedom and, frankly, I'm terrified I'll cock it up!

Two Fools have recently found themselves in a similarly fortunate position. One has inherited £40,000 and intends to use it to pay off some of his mortgage when his current deal ends in a year's time. It's a good idea but what should he do with it until then?

He's had some excellent suggestions from a fellow Fool who points out that as he will need the money comparatively soon, investing in the stock market is out of the question. His advice happens to cover exactly the sort of thing I intend to do while we think about our long-term plans, namely:

1) Stick the maximum allowance of £3,000 per person into a mini cash ISA to avoid paying tax on the interest. The best deal is currently from Barclays whose Tax-Beater ISA is instant-access and pays 6.5%.

2) Put the rest in a high-interest savings account such as IceSave which is instant-access and pays 5.7% or Scarborough Building Society which pays 5.8% although that includes an introductory bonus, so we'd have to watch for when the rate drops. Alternatively, if we're willing to commit to a full year we could consider the one-year fixed rate bond from Birmingham Midshires which pays 6.23% from next Monday. Or a similar offer from Nottingham Building Society which pays 6.2%.

There's also the possibility of buying Premium Bonds from National Savings & Investments up to the maximum stake of £30,000 per person. We're considering this ourselves for some of our money because in January 2009, the taxman will be knocking at our door demanding a substantial sum of money in capital gains tax from the sale of our property so we need somewhere very safe to put that money.

We could stick with a savings account but this way there's the chance of winning a tax-free prize of up to £1 million. And if we win anything, it'll amuse us that it was the taxman's money that enabled us to do so!

We'll tackle the other Fool's problem in a later article as he's looking at investing £100,000 for the long term which entails the stock market -- a very different kettle of fish from the simple savings account.

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