If you suddenly find yourself £500 richer, it can be very tempting to go out and spend this money immediately. However, while £500 might not seem like very much in the grand scheme of things, using this money to give yourself a one-off treat might not be the best decision.
Here are three financially savvy alternatives to make the most of these funds.
Get out of debt
According to the latest figures from the Office of National Statistics, UK household finances are in a worse state than at any time in history. Last year, UK households took out nearly £80bn in loans (the most in a decade) and deposited just £37bn with banks. These numbers are concerning. Once you get into debt, it can be challenging to get out. High-interest charges can quickly turn a small loan or credit card spend into an unaffordable liability.
So, if you have debt and suddenly come into money, the best thing you can do is pay at least a portion of this debt off.
With the average interest rate on savings accounts less than 1% and the average interest rate on short-term credit in the double-digits, paying off any debt before saving is the most financially responsible decision.
Use government incentives
If you don't have any debt, saving a £500 windfall is the next best option. Today there are at least two major government initiatives to encourage saving, both of which offer cash bonuses.
My Foolish colleague Edward Sheldon recommends opening a Lifetime ISA product, which comes with a 25% government bonus on cash deposited, which means your £500 deposit will become £625.
A similar offer is available with self-invested personal pension plans, or SIPPs. These products offer a 20% bonus on your cash. Assets held within both LISAs and SIPPs are not subject to tax, so that is an additional benefit.
The one drawback is that you cannot take funds out whenever you wish. SIPP savings can only be withdrawn after 55, and LISA savings have to be used to buy a first property or boost retirement savings (and cannot be used until age 60 in that case). Still, in my opinion, the extra cash reward far outweighs these drawbacks.
Invest in yourself
Another option is to use this money to invest in yourself. Spending your £500 on courses or books about personal finance or investing may produce a much higher return over the long term than just putting the money away on a savings account.
The monetary benefits from these actions may not be clear immediately, but don't let this put you off. Investing in yourself can yield enormous benefits over time. You could master a new skill to help you earn additional income or learn about the intricacies of the stock market.
Personally, my best investment ever was the £15 purchase of Benjamin Graham's book the Intelligent Investor. Thanks to the knowledge contained in this book, I have been able to build a career out of investing. Put simply, the best investments are not always monetary.
Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, "10 Steps To Making A Million In The Market".
The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide. Simply click here for your free copy.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.