Decide Your Priorities

When you receive a lump sum of money, what you decide to do with it will depend on your personal and financial situation. There are a certain number of priorities that should be taken care of however, before you decide.

Clear Debts

Clear short-term debts such as bank overdrafts, credit-card debts, and personal loans. Having debts is an unnecessary drain on your finances and the interest you save by paying them off will invariably be higher than the interest you can earn from putting money on deposit.

Put Aside Some Emergency Money

Put some cash aside to cope with the unexpected if you haven't already done this. You should also consider setting aside enough cash to cover major expenditure in the future, so that you avoid the expense of borrowing.

Plan for Your Retirement

Boost your retirement savings either by starting a pension or by paying extra contributions into an existing scheme. If you already belong to an employer's scheme you can choose between taking out a stakeholder pension and paying into an additional voluntary contribution (AVC) scheme, which employers have to run alongside their main pension scheme.

Buy a Home

Buy a home if you are confident that you will be staying in the same place for at least three years. Buying your own home is usually cheaper than renting and by the time you finish paying off the mortgage, you will have acquired a substantial financial asset.

Pay off Your Mortgage

Pay off some of your mortgage. Doing this can either help to boost your monthly income or can reduce the mortgage term. The downside of paying off your mortgage debt is that you may not be able to get at your cash again without selling your home or re-mortgaging. However, this is not the case with offset mortgages that link your mortgage to your savings. Instead of paying you interest on your savings, the lender offsets your savings against the amount you owe, which in turn reduces the amount of interest you pay - while still giving you ready access to your cash.

For example, if you have a £150,000 mortgage and £30,000 in savings, you are charged interest only on £120,000. And unlike interest paid on a savings account, the extra income is tax free. Swapping to an offset mortgage is no different from switching any other kind of mortgage, although you will of course have to take any penalty clauses into account.

Earn Money While You Decide

Put any money left over after you have covered the basics in an easy-access savings account paying the highest rate of interest you can find, while you consider your investment options.