What to do with PPI funds?

ldw000

Hi all,

so I am rebuilding my life after a split a few years ago, basically I am off the housing ladder and doing my best to save a deposit.

I have saved 10k and have a PPI claim paying out 10K just confirmed, I think it is going to take me 2 or 3 years to get the size of deposit I need for a decent mortgage.

Where should I put that 20k? Split it into one share tracker ISA and then a standard savings account?

I also have some credit card debt but it is manageable and dont want to use these saving to pay it off.

thanks all!

ldw

Linton

2-3 years is much too short a time for investing in the stock market. With that time frame there is a reasonable chance you will be poorer at the end than when you started. 5 years is the absolute minimum for which to consider investment, and that is pretty risky. And if you did invest in shares a single tracker is in itself fairly risky. You need a range of different investments.

Suggest you look at a 2 years fixed rate deposit for the money you dont put into an ISA.

Why dont you want to pay off the credit card debt? Unless you have a good deal the interest you are paying will far exceed any returns you can get from your lump sum.

brasso

Well, it depends on the OP's attitude to risk. I personally would put the money into stocks. Even the best fixed term savings accounts are only offering around the rate of inflation, so by suggesting putting the cash into a savings account you are answering another (unasked) question which is: - "Where do I put my money to ensure that it doesn't increase or reduce in value over the next couple years?"

If the OP wants to increase his capital, but willing to be flexible on timeframe, he could choose some stocks which are paying out good dividends but that also seem to be well-priced (VOD springs to mind). He is virtually guaranteed a yield well above inflation/savings rates of interest, and has every chance of seeing significant capital growth as well. There is very likely to be some volatility in the share prices but if he holds his nerve while reinvesting his dividends at the lower price, he will collect even more the following year.

If he wanted to invest for 3 to 6 months only, then fair enough but 2 to 3 years is a good time frame. I would be astonished if stocks plummeted and remained on the floor for the next 3 years.

Jut my 2c.

bowlhead99

brasso wrote: »

If he wanted to invest for 3 to 6 months only, then fair enough but 2 to 3 years is a good time frame. I would be astonished if stocks plummeted and remained on the floor for the next 3 years.

I completely agree it's a question of risk appetite and risk capacity as these things often are. The problem is not that the stocks would necessarily fall in the new year and stay there for 2-3 years, just that they would be at the low level on the particular day in 2-3 years when you wanted it.

FTSE is 6000ish this week, if it were 3-4000 the 10k invested would be worth 5-6.7k and the timeline for the deposit to be ready would be extended somewhat (by six months? by double the 2-3 years?)

To use your specific example, VOD might be 'well priced' in your opinion at 155p today but presumably was also fairly priced over 160p a couple of weeks ago or at over 170p a couple of months ago. We all have our opinions on the markets but will the historic dividend be maintained two years from now if VOD massively overpay in the upcoming 4G bandwidth auction or don't even get an allocation? Has the recent price fall (35p since August) been compensated by the 3p of dividends going ex-div since then? FTSE went up, VOD went down. A few pence extra div compared to average FTSE, or better growth potential than cash savings, does not make it better unless perhaps we look over the long term, and OP does not have the long term.

VOD would need to go up by 23% from today's price to recover their August level. To some, that's a buying opportunity. To others relying on it for their house deposit, that's 23% they might need and don't have.

Personally I kept a good chunk of my assets in shares while saving for a deposit but that's because I'm something of a gambler. I also didn't pay off all my cards while saving as at the time I felt it was worth the interest cost to buy the flexibility of a larger rainy day fund rather than perhaps needing to borrow on a rainy day. These aren't the typical recommendations though.

If you like the odds, go for it, but no IFA would recommend 50% stocks investing for a fixed goal 2 years out. I'm not one, so might be wrong on that. Of course if the average high street customer received that advice they would love it - because if it works out they'd be rich, and if it fails they have a complaint with which to chase compensation.

Linton

I agree that buying shares for 2-3 years is a gamble. It may pay off although there is a good chance it wont. So if you like gambling it's an alternative to putting some of your money in a savings account and spending the rest on the horses or roulette wheel.

However this is not in my view serious investing. I would use this term to mean setting the conditions such that the odds are strongly in your favour. Unless you have special knowledge that is not available to the general market a time period of many years is necessary.

brasso

bowlhead99 wrote: »

I completely agree it's a question of risk appetite and risk capacity as these things often are. The problem is not that the stocks would necessarily fall in the new year and stay there for 2-3 years, just that they would be at the low level on the particular day in 2-3 years when you wanted it.

FTSE is 6000ish this week, if it were 3-4000 the 10k invested would be worth 5-6.7k and the timeline for the deposit to be ready would be extended somewhat (by six months? by double the 2-3 years?)

To use your specific example, VOD might be 'well priced' in your opinion at 155p today but presumably was also fairly priced over 160p a couple of weeks ago or at over 170p a couple of months ago. We all have our opinions on the markets but will the historic dividend be maintained two years from now if VOD massively overpay in the upcoming 4G bandwidth auction or don't even get an allocation? Has the recent price fall (35p since August) been compensated by the 3p of dividends going ex-div since then? FTSE went up, VOD went down. A few pence extra div compared to average FTSE, or better growth potential than cash savings, does not make it better unless perhaps we look over the long term, and OP does not have the long term.

VOD would need to go up by 23% from today's price to recover their August level. To some, that's a buying opportunity. To others relying on it for their house deposit, that's 23% they might need and don't have.

Personally I kept a good chunk of my assets in shares while saving for a deposit but that's because I'm something of a gambler. I also didn't pay off all my cards while saving as at the time I felt it was worth the interest cost to buy the flexibility of a larger rainy day fund rather than perhaps needing to borrow on a rainy day. These aren't the typical recommendations though.

If you like the odds, go for it, but no IFA would recommend 50% stocks investing for a fixed goal 2 years out. I'm not one, so might be wrong on that. Of course if the average high street customer received that advice they would love it - because if it works out they'd be rich, and if it fails they have a complaint with which to chase compensation.

Well, I'm presuming that there is no fixed, particular day in 2 or 3 years when the money is needed. If there was, then I would agree with you that this would be unwise.

VOD was just an example of a share that will 1) pay you more than the standard savings rate, and 2) that some believe is more likely than not to see an increase in its share price over the next 2 or 3 years from a relatively low point. If you can find another bunch of stocks in this category, you could do pretty well over 3 years, though of course nothing is guaranteed. Just my view, based on my own attitude to risk. Though I have to say that my attitude to risk has softened a great deal over this period of low interest rates and rising inflation, when savings accounts seem guaranteed only to preserve, or even slightly erode, your money. I would rather take the risk.

All that said, the best financial advice of the lot is that the OP should pay off his credit card debts in full, then get rid of them all -- or keep one but set up an arrangement to pay it off in full every month. That would quickly give him a much clearer picture of how much savings he actually has.

Good post though -- and I enjoyed your last line!