Knowing what to do with a substantial cash sum can be difficult. If you are not careful when making your choice you could end up missing out on a good return or even see the value of your cash start to fall.

Here is what you need to consider if you have a significant amount to save.

Is saving or investing the best choice?

Before you start looking at opening a savings account or investing your money you need to consider whether it could be better used elsewhere.

Saving is not always the best option and it is possible that using your money in some other way will do more for your finances in the long run. Here are just some of the alternatives you should consider:

Clear outstanding debts

If you have any outstanding debts then you should consider using your savings to clear any that you can repay without penalty as a priority.

This is because the interest charged by most credit cards and loans is significantly greater than the return paid on even the most competitive savings accounts or profitable investments.

So while savings accounts and investments can offer the potential for substantial profit, paying off expensive debts could save you significantly more in interest charges.

Start by listing all your outstanding debts with details of the interest you are being charged on each so you can see which of your debts is the most expensive.

To make the most of your money you should start by paying-off the most costly first, and then clearing as much of your remaining debts as possible.

However, before writing the cheque or transferring the money you will need to check if there are any restrictions on whether you can re-pay each debt early.

While this is unlikely to be the case with a credit card, some fixed rate personal loans will charge an early repayment charge which will influence your decision as to whether it is worthwhile re-paying the debt early.

If you have enough money to completely clear a loan that applies a penalty then you should check whether the early repayment charge is more or less than the amount of interest you will end up paying if you keep to the agreed schedule.

If clearing the loan now works out cheaper and you do not have any penalty-free debts to clear it is definitely worth considering. For more help read our guide: Should I use my Savings to pay off my Debts?

Overpay your mortgage

Using your savings to reduce the balance on your mortgage could save you hundreds or thousands of pounds in interest.

However some mortgages place a limit on the amount you can overpay, this is often 10% of the outstanding balance each year. If you overpay more than this you could be hit by an early repayment charge.

Check your mortgage documents or contact your mortgage provider to find out how much you could overpay without penalty. Consider doing so if you do not have any other outstanding debts.

If you have enough money to pay off a significant amount of your mortgage but would be charged for doing so, it is still worth considering.

Work out how much you will be charged in early repayment charges if you cleared a substantial amount of your mortgage early, and compare this to the amount you would pay out in interest over the remainder of your mortgage deal. Go with whichever option works out cheaper in the long run.

There are, of course, other things to consider. Read our guide: Should I overpay my Mortgage? for more help deciding.

Use your ISA allowance

If you have not yet used your ISA allowance for this tax year then you should consider using some of your money to open one.

The main benefit of an ISA is that it is tax free so you keep all the interest or profit paid on your money, without the tax man taking a cut.

For the 2015/16 tax year, the annual ISA allowance is set at 15,240. You can choose to save this in a Cash ISA or invest it in a Stocks and Shares ISA.

For more information read our guide to understanding and choosing between ISAs.

Build your retirement savings

With the recent changes to the state pension you can no longer rely on the government to fund your retirement plans, so you need a contingency plan to secure a more comfortable retirement.

Depending on your individual circumstances and existing retirement provisions you may want to consider using your money to invest in a pension.

As an added benefit, investing your money in a pension will also have a number of tax benefits, and depending upon your income it could boost the value of your fund by up to 50%.

For more information read our guide: Should I get a Pension?

Save or invest

Once you rule out the alternatives, you need to take the time to look at the various saving and investment opportunities on the market and choose the one that best meets your needs.

Factors you will need to consider include how long you want to tie the money up, how much risk you are willing to take and if you want to take an active or passive role in choosing your investments.

Savings accounts

If you have used your tax free ISA allowance and want a low risk home for your money, a standard savings account is likely to be your best choice.

You will need to look for a savings account that offers the best possible interest rate while giving you the access you need to your money.

As you would be keeping your money in cash rather than 'investing' it the potential profits are likely to be more modest, however you would be guaranteed to receive the stated interest rate paid on the savings account.

If you are happy to lock your money away for a set period a fixed rate bond or notice savings account could offer a better return, while an instant access account will give you the benefit of being able to withdraw your savings at any point without penalty.

If you have a substantial sum of money to deposit then you should also consider splitting your cash amongst several financial institutions.

This is because the FSCS only guarantees deposits of up to 75,000 per financial institution (150,000 in joint accounts)*. So if the bank or building society that holds your money goes bust, any savings over 75,000 would be lost.

For more information read our guide: Which Banks Count as One Under the Financial Services Compensation Scheme (FSCS)?

For help deciding use our savings comparison tables to compare all the savings accounts on the market and find the best possible home for your money.

Popular investment options

If you are unenthused by the savings rates on offer and are happy to tie your money up for a number of years (a minimum of 5 years is usually recommended), investing could potentially offer a better return for your money.

The main drawback to this option is that it is likely to expose your initial capital to some risk. You are able to mitigate the amount of risk that your money is exposed to through the investment choices you make, but even if you choose a low risk investment you would need to be comfortable that your money could drop in value if your investments perform badly.

However, over a long term period, investing has tended to easily outperform cash savings accounts and could offer a better return overall.

Knowing exactly where to invest can be tricky, and due to the risk involved any potential profits are by no means guaranteed.

Investment ISAs

Many investment are available within a tax free ISA wrapper. This means you do not have to pay tax on the profits your investments (within the ISA limit) earn.

For this reason it always makes sense to check if your planned investment can be placed within an ISA wrapper, assuming you haven't already used your annual ISA allowances as mentioned above.

Investment Trusts

An Investment Trust is a type of grouped investment where your money is pooled with other investors' cash to buy shares across a wide range of companies.

The main idea behind an Investment Trust is that it allows you to spread your risk by investing across hundreds of different companies in a cost effective way.

For more information and help deciding if an Investment Trust is the right choice for your finances read our guide: What is and investment trust?

Unit Trusts & OEICs

One of the most popular methods of investing is through a Unit Trust or OEIC.

This type of investment is similar in many ways to an Investment Trust, as it allows you to invest your money in a large fund with other investors.

This investment fund is then used to purchase stocks and business shares with the aim of generating a profit.

However, unlike an Investment Trust, a Unit Trust is an open ended investment and there is no limit to the number of people who can invest in each trust fund.

Read our 9 Steps to Finding an Investment Fund That Will Maximise Your Profit for more information on choosing your investments.

Share dealing

Another option is to set up your own portfolio of shares and deal in individual companies' stock directly.

Doing this can be an exciting and interesting way to invest your money, as you follow the fortunes of individual companies, however it can also be a much riskier investment than choosing an Investment or Unit Trust.

Read our guide: How to Start Investing in Shares for information on what you need to look out for when you start share dealing.

High risk investments

If investing in the stock market does not appeal to you then there are a whole host of other investments which you could consider.

However, as these types of investments are usually considered high risk so you would need to feel comfortable seeing the value of your investments rise and fall over time.

Essentially money you invest in the following you would need to consider as disposable income which you are happy to speculate with.

Forex trading

Trading on the currency markets can offer substantial rewards, but at the same time it presents a very high risk to your capital, as it can be incredibly difficult (some might say impossible) to predict how national currencies will fluctuate in value.

The main risk to your money is the sudden drop or collapse in value of your chosen currency, equally profit can be made if you choose a currency on the rise.

For more information read our guide: Forex Trading - How to get started.

Asset investments

With a fluctuating stock market and volatile banking sector, more and more people are looking to alternative investments as a safe haven for their money.

Investing in precious metals such as gold, platinum, or silver, or in antiques, art or fine wines are increasingly popular choices but again are high risk options.

The value of these types of investments can fluctuate quickly meaning you are at risk of seeing your assets soar and fall in value in a short time period.

Property investment

Many people choose to invest in bricks and mortar rather than stocks or shares.

There can be a number of advantages to this; namely you may be able to earn an income by renting the property and if property prices increase, so will the value of your investment.

However, there are a number of draw backs that you should consider before visiting your nearest estate agent.

Firstly, unless you have enough money to purchase a property out-right you are likely to need to take out a buy to let mortgage, which will add extra costs to your property venture.

If this is the case, with property prices fluctuating in value, there is no longer the guarantee there once seemed to be that the value of your property will increase or even stay the same.

Finally, if you decide to rent out the property to generate an income you will be taking on a host of responsibilities as a landlord which you would not be presented with if you opt for a different investment route.

For more information read our guide: Do You Have What it Takes to Be a Property Developer?

Speak to an IFA

If you have a large amount of money to invest or are unsure which option is the best choice for your individual circumstances then you may want to speak to an Independent Financial Advisor.

An IFA will be able to look at your finances in detail and recommend a selection of different options that are well suited to your financial goals and circumstances.

However, you should not simply pick an IFA at random. You could find yourself being offered investments and savings accounts that are not the best for you but pay the IFA the highest commission.

Instead, you need to do a bit of legwork and look for an IFA who has your financial needs at heart, read our 5 Step Plan to Finding an IFA You Can Trust with Your Money for more help choosing.