A financial windfall can happen in many ways. Perhaps you recently received a life insurance payout or an inheritance. Or you got a sign-on or holiday bonus at work. Or your company just IPOed. Perhaps you sold your home and don’t intend to purchase a new one anytime soon (or you don’t need the entire proceeds from the sale to purchase your new home). Alternatively, you might have won a sizable scratch-off lottery ticket enclosed in a birthday card. Hey, it could happen ….
You have a sizable sum of money that is just waiting to be placed, wherever you obtained it. Now it’s time to choose what to do with it. Making the best use of a one-time cash infusion can seem like a big decision, but it doesn’t have to be difficult if you have a plan. These are the best actions to do next to ensure that you are maximizing your newly acquired wealth.
Congratulations on receiving a lump sum of money! Whether it’s from a bonus, inheritance or selling an asset this windfall presents an excellent opportunity to improve your financial well-being. However, deciding where to put this money can be overwhelming, especially with the vast array of options available.
This guide will explore various options for investing your lump sum, considering factors like risk tolerance, time horizon and financial goals. We’ll also delve into the pros and cons of each option, helping you make an informed decision that aligns with your individual circumstances.
Understanding Your Risk Tolerance and Time Horizon
Before diving into specific investment options, it’s crucial to understand your risk tolerance and time horizon. These factors will significantly influence the types of investments that are most suitable for you
Risk Tolerance:
- High: You’re comfortable with potential volatility and the possibility of losing some money in exchange for the chance of higher returns.
- Moderate: You prefer a balance between risk and reward, seeking steady growth with some potential for fluctuations.
- Low: You prioritize capital preservation and prefer investments with minimal risk, even if it means lower potential returns.
Time Horizon:
- Short-term (less than 5 years): You’ll need access to your money within a few years, limiting your investment options to those with high liquidity and low risk.
- Medium-term (5-10 years): You have a longer time frame to ride out market fluctuations, allowing for a wider range of investment options with moderate risk and growth potential.
- Long-term (10+ years): You have ample time to weather market ups and downs, enabling you to invest in higher-risk assets with the potential for significant long-term growth.
Where to Put Your Lump Sum: A Comprehensive Analysis
Once you understand your risk tolerance and time horizon, you can start exploring specific investment options. Here’s a breakdown of some popular choices, along with their pros and cons:
1. High-Yield Savings Accounts:
- Pros:
- FDIC-insured, offering security for your principal.
- Easy access to your money.
- Higher interest rates compared to traditional savings accounts.
- Cons:
- Returns may not outpace inflation.
- Limited growth potential.
2. Certificates of Deposit (CDs):
- Pros:
- Guaranteed return over a fixed term.
- Higher interest rates than savings accounts.
- FDIC-insured, offering security for your principal.
- Cons:
- Early withdrawal penalties.
- Limited liquidity.
3. Money Market Accounts:
- Pros:
- Higher interest rates than savings accounts.
- Check-writing privileges and debit card access.
- FDIC-insured, offering security for your principal.
- Cons:
- May require minimum balance to avoid fees.
- Limited growth potential.
4. Stocks and ETFs:
- Pros:
- High growth potential.
- Diversification options through ETFs.
- Potential for long-term wealth accumulation.
- Cons:
- Higher risk of loss.
- Market volatility can lead to significant fluctuations.
5. Bonds:
- Pros:
- Steady income stream through regular interest payments.
- Lower risk compared to stocks.
- Diversification options through bond funds.
- Cons:
- Lower potential returns compared to stocks.
- Interest rate risk can impact bond prices.
6. Real Estate:
- Pros:
- Potential for appreciation and rental income.
- Tangible asset with long-term value.
- Tax benefits for homeowners.
- Cons:
- High upfront costs.
- Requires ongoing maintenance and management.
- Market fluctuations can impact property values.
7. Precious Metals (Gold, Silver):
- Pros:
- Hedge against inflation.
- Potential for long-term value appreciation.
- Tangible asset with intrinsic value.
- Cons:
- Price volatility.
- Storage and security costs.
- Limited income-generating potential.
8. Robo-Advisors:
- Pros:
- Automated investment management.
- Low investment minimums.
- Diversification through pre-built portfolios.
- Cons:
- Limited customization options.
- May have higher fees than traditional advisors.
9. Annuities:
- Pros:
- Guaranteed income stream in retirement.
- Tax-deferred growth potential.
- Protection against outliving your savings.
- Cons:
- High fees and surrender charges.
- Limited liquidity.
- Complex product structure.
Additional Considerations:
- Tax Implications: Different investment options have varying tax implications. Consider consulting a financial advisor to understand the tax consequences of your investment choices.
- Fees and Expenses: Be mindful of fees associated with different investment options, such as management fees, transaction fees, and expense ratios. These fees can eat into your returns, so it’s crucial to factor them into your decision-making process.
- Diversification: Spreading your investments across different asset classes can help mitigate risk and improve your portfolio’s overall performance.
Choosing where to put your lump sum of money is a personal decision that requires careful consideration of your risk tolerance, time horizon, financial goals, and individual circumstances. By understanding the pros and cons of various investment options and conducting thorough research, you can make an informed decision that aligns with your financial objectives and sets you on the path to long-term financial success.
Remember, there’s no one-size-fits-all answer to this question. The best place to put your lump sum will depend on your unique circumstances. However, by carefully considering the factors discussed in this guide, you can make an informed decision that will help you achieve your financial goals.
Step 2: It’s OK to spend a little
It’s your money; don’t feel guilty about spending it. Pay the security deposit on a new apartment, buy new furniture for your workspace, take a trip, or replace your coffee table with a portion of the lump sum. Seriously. We’re here for it.
What to do with a large sum of money
You may feel under a lot of pressure to use this sizable quantity of money appropriately, particularly if it was given to you for an extremely sentimental reason—such as the death of a loved one. Additionally, you may receive a lot of viewpoints from people who are very opinionated about what that looks like.
But if you’re experiencing overwhelm, that’s a) acceptable; and b) understandable. Put the money in a savings account for a few weeks or months while you decide what to do next, and ignore those people. It could also be beneficial to discuss your options with a financial planner, such as the CFP® experts on Ellevest’s all-female team, who can assist you in determining how to use this money to achieve your objectives.
FINANCE PROFESSOR EXPLAINS: Best Way to Invest Large Chunk of Money
FAQ
What is the smartest thing to do with a lump sum of money?
Where is the safest place to put a large sum of money?
Where is the best place to put large sums of money?
How do I invest a lump sum?
If the lump sum is seed money for your brand-new portfolio, identify your investment goals; next, find economic sectors you like and understand; then, set the percentage of the sum to invest in each of the sectors and how many stocks you want. Here are resources to help you get started.
Should you invest a lump-sum or a dollar-cost averaging?
Investors must decide whether to invest all at once, or slowly invest the funds over time. From a mathematical standpoint, a lump-sum investment will usually outperform the dollar-cost averaging method. Let’s say you have a large windfall of money, like $100,000, that you want to invest in stocks and bonds.
Should you invest in a $100,000 lump sum?
Once you’ve determined how you want your money managed, time is of the essence to start putting that money to work in the market. A $100,000 lump sum offers a unique opportunity to pad your savings — and beyond, maxing out your retirement account (more on that later).
Should you invest in a lump sum or a dollar cost averaging?
Invest in stocks, fractional shares, and crypto all in one place. “I usually recommend that clients invest in a lump sum instead of dollar cost averaging,” says Ryan Bayonnet, a financial advisor with Hyland Financial Planning in Uniontown, Ohio.