How to manage and invest a windfall this Christmas – and beyond

• Myron Jobson, interactive investor’s senior personal finance analyst, shares top tips on how to manage a financial windfall and invest

The festive season often brings with it the joy of giving and receiving gifts, and sometimes, that includes substantial financial gifts.

Receiving a financial gift for Christmas can be a great opportunity to strengthen your financial resilience and bolster your wealth. An added benefit is tax is not payable on a cash gift – although you’d be required to pay tax if the gifted money generates interest or dividends.

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Myron Jobson, Senior Personal Finance Analyst at interactive investor, explores how to effectively manage, save, and invest a sizeable financial gift to strengthen your financial security and work towards your goals.

Step 1: Assess your financial situation

Before you decide how to allocate your financial gift, first consider your current financial standing. Do you have any outstanding debts? Are there upcoming expenses or financial goals you need to consider – like saving for a property or school fees?

Having a complete understanding of your financial position will help you make informed decisions about how to use your gift effectively.

Step 2: Pay down high-interest debt

If you have high-interest debt, such as credit card balances or personal loans, using your financial gift to pay down these debts should be a priority. You should focus on paying off the debt with the highest interest and charges first. Doing so would save money on interest payments and improve your overall financial health.

Step 3: Build or fortify your rainy-day fund

One of the best uses for a financial windfall is to bolster your rainy-day fund. An emergency fund is a crucial financial safety net that can cover unexpected expenses, such as a broken boiler or car repairs without derailing your financial stability. Aim to have three to six months’ worth of living expenses saved in an easy access savings account.

Step 4: Invest for the future

If your emergency fund is well-stocked and you have no high-interest debt, consider investing your financial gift. This option can pay dividends for those who can afford to keep their money tied up in investments for at least five years. It offers the potential for higher returns compared to traditional savings and can help to protect the value of your money as the cost of living rises. 

Step 5: Save for specific goals

If you have specific short-term financial goals, such as buying a home, furthering your education or starting a business, allocate a portion of your gift towards these objectives. Setting aside money in a high-interest savings account or a dedicated savings account for each goal can help you stay organised and motivated.

Step 6: Treat yourself wisely

While it’s important to be prudent with your financial gift, it’s also OK to use a portion to treat yourself. The key is moderation - spend on something meaningful that brings you joy, but also ensure a decent chunk of your gift is working towards your financial wellbeing.

How to invest

Diversify your investments

Diversification is the name of the game when it comes to investing. Spreading your eggs instead of having them in one basket it reduces the risk of any one stock in the portfolio hurting the overall performance.

When it comes to diversification, that doesn’t just mean investing in different stocks. It also means having exposure to different sectors, assets and regions.

Start simple

It is easy to get overwhelmed with the different investment jargon. There’s something to be said for making sure, as an investor, you don’t try to run before you can walk – and multi-asset funds offer exactly this. This type of fund makes the investment decisions on your behalf – splitting your money across a mix of different assets, but mainly shares and bonds.

Drip feed your investments 

A good and proven way of lowering your investment risk is by investing small amounts regularly. Most often, investors do this by drip feeding investments monthly to help smooth out the inevitable bumps in the market. The advantage is that you also buy fewer shares when prices are high and more when prices are low – a process known as pound-cost averaging.

Make use of tax wrappers 

Take advantage of tax wrappers – accounts that 'wraps' around your investments or savings to offer some protection from tax.

Individual Savings Accounts (ISAs) are a fantastic way to invest money without paying taxes on your returns. Each tax year, you can invest up to a certain limit (currently £20,000) in ISAs. There are different types of ISAs, including cash ISAs – a type of savings account - and stocks and shares ISAs. Stocks and shares ISAs, in particular, allow you to invest in a wide range of assets, such as stocks, bonds, and mutual funds, and all gains and dividends are tax-free.

Self-Invested Personal Pensions (SIPPs) offer another tax-efficient way to save for retirement. Contributions to a SIPP are tax-deductible, meaning you get tax relief on the money you put in at your margin rate of income tax (20%, 40% and 45% if you are a basic, higher and additional rate taxpayer, respectively) and investments grow free from capital gains and dividend tax.

You can withdraw up to 25% of your pension tax-free once you reach 55 years of age (57 from 2028), subject to a maximum of £268,275. The rest is taxed like normal income.

Start as early as you can

When it comes to investing, the key is to start as early as you can, because the sooner you begin, the more time your investments have to benefit from a phenomenon known as ‘compounding’ – something Albert Einstein is said to have dubbed the eighth wonder of the world.

For investors earning returns on previous returns, compounding works a lot like a snowball rolling down a mountain: it starts off small but turns into something much bigger with momentum.

Pay attention to platform charges

When selecting an investment platform, it’s crucial to understand the fees in all aspects of your portfolio. Take the time to grasp what you pay for your platform, your fund and investment trust charges, and any transaction fees you incur, such as for trading activities. This will help you to keep as much of your growth and income as possible.

With percentage-based platform charging, the more people grow their investment pots, the more they must pay the platform in fees. interactive investor charges a flat monthly fee, which means you get to control your costs and keep more of your wealth, even as the value of your portfolio increases, helping you reach your financial goals quicker.