Do you watch those TV game shows that offer nice but modest amounts of cash? I’m a Pointless regular, which offers escalating prizes from £1,000, and the finalists are always asked what they’ll do with the money if they win.
They usually say they’ll go to Vegas, or buy a new shed, or have the dog repainted, or whatever. In the years I’ve watched, I’ve never heard anyone say they’ll just add it to their savings, or invest it in a good dividend-paying stock, or anything sensible but boring like that.
So what would I do with a £1,000 that came my way unexpectedly? Putting aside the fact that I’m married, which means it would be a management decision, I’d be thinking the following.
Pay off debt
If I had any non-mortgage debt, like credit card debt, the £1,000 would go towards clearing that as my number one priority. Saving the money isn’t an attractive proposition, not when Cash ISAs are offering pitiful annual interest rates of around 1.5%, or less.
Investing in good dividend stocks is a tempting proposition, especially with the FTSE 100 on an overall forecast yield of 4.5%. And you should be able to do even better with individual shares.
But where’s the point in earning even 4.5% from an investment while paying, what, 30% or worse in credit card interest? It’s a guaranteed losing combination. So the £1,000 would go straight off that debt, saving me £300 or so in interest that I’d have almost no chance of recovering from a stock investment.
Savings
I poo-poo the idea of saving at current interest rates. But what I’m really railing against is the idea of tying up long-term investments for such meagre rewards. But we really should have some sort of cash stash put aside for short-term emergencies.
Do you want to be like that family on the telly whose boiler has broken and they can’t have showers, and they all have to stink for a day while Mum arranges a short-term loan at an astronomical interest rate to get it fixed? Payday loans might seem like a handy way to get out of an emergency cash squeeze, but you’d be so much better off if you had a boiler-repair amount of cash saved somewhere to cover things like that.
So I say don’t go to Vegas, but put the money into a short-term cash pot, and try to get it up to at least the equivalent of a month’s salary.
Investments
Now I’m probably expected to say here that I’d be very sensible and, with no non-mortgage debt and with a bit of short-term cash saved up, I’d invest it all in blue-chip investments paying decent dividends.
But actually, if there’s anything I really wanted to buy, I’d probably go for it. I’ve been prevaricating over getting a tripod for macro photography for months, and I’d need a solid one that would cost about £200. So I’d get one.
Then the rest of my grand, around £800, would indeed go into a stock investment, and I’d be picking one of the many current great dividend payers in the FTSE 100. But if I ever make the final of Pointless, I’ll tell them I plan to buy two sheds.