You find yourself the benefactor of a financial windfall and you suddenly have advice swirling all around. Here are some ideas of how to invest a financial windfall.
The Dangers of a Financial Windfall
There are dangers when you get a large lump sum of money. What you should do first is put the financial windfall in the bank and hide the check book or bank card. Sit down and think before you spend any of this money. It is too easy to suddenly feel very rich and go out and buy all of the items you have always wanted.
Do not let any stock brokers, investment advisors or others talk you into the hottest stock or ETF. You should use an accountant to keep you clear on taxes. Do not brag about your financial windfall; be professional in your actions and thinking.
Depending on the amount of your financial windfall, it might not be as much money as you think it is. We all tend to think in monthly payments, which can sometimes not look like a lot of money, especially when compared to a financial windfall amount of money.
It is amazing how much clearer amounts of money become when they are written down on paper. Sit down with paper, pen and a calculator and add up those seemingly minor monthly bills and put them all into per year amounts. They will look much larger.
The real danger of a financial windfall is you could easily run out and buy items you have always wanted only to find you really didn’t want them and your financial windfall disappears quickly.
There is a big difference in items you need and items you want, you might never have another financial windfall again so be frugal and think things through.
The First Thing to do With the Financial Windfall
Talk to an accountant and make sure you have the taxes figured out on this financial windfall, it might be less than you think it is after taxes.
Think about paying down some debt. If you have debt that is always on your mind, making you worry and causing sleepless nights, those are the debts you should think about paying off first.
You could pay off your debt with the highest interest rate or get caught up on past due debt. You might ask how this is considering investing your financial windfall. If you have interest payments of 10% for example, paying them off can be considered an investment that you just gained 10% on.
Once you do that, then you can look at your overall net worth and decide on your goals.
Do you have a good 401k and or IRA? You can maximize your IRA for the year. Do you want to buy a house some day or do you need to start a college fund.
Think about all of this before you spend or invest any of your financial windfall, because money goes faster than you might think.
Where to Invest a Financial Windfall
When it comes to investing, your age matters, the younger you are the more risks you can take with investing. You get older quicker than you can realize, so invest with the distant future in mind, not just next week because you never know when there will be the next Great Depression or the next Great Recession will strike.
As I write this in 2010, the economy and the job market is still very uncertain. The name of the game is capital preservation. By March 2009, many people lost between 40% and 70% of their net worth and retirement accounts. The people who lost much less had a diversified portfolio mix of bonds and stocks.
Your money should earn something for you and bank rates and CDs do not pay very much. Most people are making good money now investing in less than investment grade bonds and junk bonds. Good yields, but still very risky and you could lose a large portion of your financial windfall and bonds can be hard to understand.
Stocks, Mutual Funds and ETFs
Do not fall for any get rich quick stocks or ETFs. Do not have the false belief you are suddenly rich and can trade the stock market with the best of them. Even if your financial windfall is one-million dollars, that doesn’t suddenly make you a genius at stock market trading. Invest wisely and be frugal. Think about your retirement and how to plan for it.
There are some attractive yields and dividend stocks you can invest in, but that doesn’t tell the whole story, some of those stocks can be risky, remember, there was a time we used to think Citigroup and Bear Stearns were safe.
Some stocks that might be fairly safe with a good paying yield are Verizon (V), McDonalds (MCD) or AT&T (T). McDonalds continues to do well worldwide.
There are numerous ETFs (exchange traded funds) that invest in good dividend paying stocks. One you can look at is iShares Dow Jones Select Dividend (DVY). Choose your mutual funds and stocks carefully.
Invest in a Home
If you do not own your own home, should you buy or rent your home. With house prices and mortgage rates low now, it could be the right time for you to invest in a home. This would depend on the amount of your financial windfall, but a large down payment can really lower your monthly costs. Just don’t buy more house than you realistically need.
Invest in Yourself
Invest your financial windfall wisely; make every penny of it work for you. You can use some of the money to increase your knowledge in some skill that might increase your worth in the work force or your enjoyment.
Companies are looking for more bilingual workers, learning a second language is one way to enhance your work skills. Invest your financial windfall in yourself by taking other courses to enhance your skills.
Conclusion
Money can disappear quickly; look at many of the very rich athletes who eventually file bankruptcy. Look at your financial windfall carefully as if this will be the last large amount of money you will ever get and you won’t waste it. Invest it wisely.
© August 2010 Sam Montana
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