If you just happened upon a lump sum of change then you have probably wondered if you should spend it, invest it, pay down debt or even give it away. I’ll go over a few good and bad ideas on the investing side of house for your newfound wealth.
What you should do with your money really depends on how long you are willing to part ways with it and how much risk you want to take. Below is a quick navigation panel to each of the topics.
Table of Contents
Do: Savings Accounts
If you have plans for the money in the next 1 to 2 years, then playing it safe is probably the best course of action. Perhaps you are planning to use the money as a down payment on a house or even to buy a car.
Using an FDIC insured Savings Account is a great way to ensure that whatever money you stick in there will be around when you need it… no matter what. This safety does come at a cost, however. You can expect next to 0% interest and a negative real return when considering inflation.
Bankrate keeps a compilation of average savings rates available here.
Most traditional banks have the lowest returns and online banks such as Ally Bank are able to return about 0.5% more. All are negligible in terms of real benefit. Inflation at the time of writing is between 5%-6% implying that any money put into a savings account will have less buying power over time… substantially less.
Thus, sticking money in a savings account should be done thoughtfully.
If you don’t need the money in a year or two then you should consider another option that can better protect your purchasing power and preferably grows it even larger.
Don’t: Hide Cash Under Your Mattress
As mentioned above, using a savings account you will likely lose purchasing power over time. So why bother? Why not just chuck it under the mattress and sleep well knowing that your money is nearby?
There are a couple of reasons to be leery of keeping your cash hoard in its physical form.
First, it will earn even less interest than a savings account. As paltry as current returns are, 0% is even less. Rates fluctuate all the time and to take advantage of hopefully future increases in savings rates your money will need to be in some type of an account.
Second, your money won’t be insured by the FDIC. If anything happens to the money in your savings account, you will likely be covered by the bank or the FDIC if the bank goes out of business. If your house burns down with your cash stowed in it the money is likely gone. Your homeowner’s policy likely has a limit on how much cash it will replace unless its specifically outlined in your policy.
Third, your money is not as liquid when in cash form. This means that it is not as easily spendable. This may seem somewhat shocking since cash has long been considered ‘king.’
Consider a case where you might need the money in a pinch: you are on travel. Your money is under your mattress. In this case it might as well be on the moon. If it were in a savings account, it could be easily transferred and used for whatever purpose you needed it for.
Do: Certificates of Deposit (CDs)
If you are certain on the amount of time you won’t need access to your money and the timeframe is still less than 2 years, then a Certificate of Deposit may be exactly what you are looking for. A CD is basically a savings account, however, your access to the funds is limited during the specific period you have purchased a CD for.
The interest rates you can earn for a CD can still be quite low, but they are better than just using a simple savings account. Once again, Bankrate has a listing of available rates on CDs. For CDs 2 years and under you can expect about an extra 0.5% in return versus a standard savings account.
CDs are insured by the FDIC just like savings accounts if you choose a bank that is covered.
Something to watch out for is that CDs may have variable rates. If you are expecting the Federal Reserve to raise short-term interest rates, then going the variable rate may be to your benefit.
As exciting as the late 1990’s were with the crush of Beanie Babies turning soccer moms into millionaires, it is not a good idea to try and replicate it. Collectibles are generally relegated to a small market. Only those with a specific interest in your collectible know its value… and that amount could be widely dependent on individuals’ ability to pay for it even if they really want it.
Buying collectibles and hoping for them to appreciate may leave you waiting many years or decades before you can cash in. If you had purchased beanie babies about 25 years ago, they would be just about completely worthless today… although I’m sure you could burn them for heat so there’s that.
If you are interested in how spectacular investing in collectibles can go wrong, then there is book for you. Entitled, ‘The Great Bean Baby Bubble: The Amazing Story of How America Lost Its Mind Over a Plush Toy – and the Eccentric Genius Behind it,’ can be found here.
As controversial as this might sound, I do believe that you should consider NFTs (Non-Fungible Tokens) like collectibles. If you don’t know what an NFT is then I have written an entire article on the topic called the ‘NFT Investing Guide.’ NFTs seem very much like beanie babies from my vantage point.
A little-known investment vehicle that is like a CD but can pay much more in interest and is backed by the United States Government is something known as an I-Bond. I-Bond’s are issued directly by the U.S. Treasury and must be held for at least 1 year.
If you have never heard of I-Bonds it is likely because the financial industrial complex can’t profit off the sale of them… which means they aren’t incentive to tell you about them. But this doesn’t mean you can’t make quite a bit of money off of them. Current risk-free interest rates for them are above 7% (circa late 2021). You can find the rates directly on the U.S. Treasury’s website.
Rates do reset every May and December and there are limits on how much you can purchase. Individuals can buy up to $10,000, couples can buy $20,0000 and you can even buy an additional $10,000 for dependents in custodial accounts.
One thing to keep in mind is that if you redeem an I-bond prior to it maturing for 5 years you will lose the prior 3 months’ worth of interest. So, if you only intend to hold for 6 months your effective interest rate is cut in half… even so that would be substantially higher than returns from a Savings Account or even CDs.
Don’t: Multi-Level Marketing
What some folks out there call Multi-Level Marketing (MLM) or Network Marketing I call a Pyramid Scheme. You would be doing yourself a favor by recognizing such scams before you find yourself invested in one.
Anytime you are pitched the idea of selling products from your home, online or at ‘parties,’ you have to ask yourself why does it sound so easy?
MLMs make money by selling to you. Not to the people you are supposed to be pushing the product to. You are the one that must hold the inventory and ultimately once you purchase the merchandise from the MLM their incentive is done. They have made their money.
The reason MLMs are usually Pyramid Schemes is that junk rolls downhill. The MLM likely will give you a cut of anyone that you bring into the program… and sometimes a cut of anyone they bring into the program.
Thus, the more people you help the MLM get rolled into the scheme your profits theoretically get larger.
But that’s the rub. At some point the MLM can’t grow anymore. Someone ends up left holding the merchandise when the whole thing goes caput. Those folks are stuck with inventory and any money they used to purchase it.
Don’t make becoming a MLM salesperson the focus of your cash stash. It will only deplete your bank account… and your reputation to those you try to peddle your wares to.
Do: Bond Funds
If you have a longer time horizon, investing your sum into a bond fund could be a good idea. For a 2–5-year runway, various bond funds let you invest in a mix of bonds across industries. Companies sell debt with fixed repayment terms. That means interest returned on funds can remain somewhat constant.
If you are interested in investing in a Bond fund, you should know there are a large number to choose from. They range in quality, so buyer beware. One bond fund, however, that is easily investible through an ETF is Vanguard’s Total Bond Market ETF. The stock ticker is BND.
With an incredibly small expense ratio of under 0.04% and broad mix of investment-grade bonds, this fund is an easy way to get exposure without thinking too hard.
Don’t: Individual Bonds
Buying individual bonds is dangerous. It is the opposite of ‘diversifying your portfolio’. Going the individual route may result in what appears to be higher returns, however, if the company that issued the bond goes out of business, then you will likely lose your entire investment.
Additionally, bonds are usually callable by the issuer. This means if the company that sold the debt can find a better rate it can repay you immediately and you are stuck looking at finding another investment… all the while earning nothing on your principal.
Bond funds alleviate the risk of default by spreading out the losses across all the participants of the fund. Likewise, the fund is usually rolling over any called bonds or earned premium into new bonds averaging out the amount of time money is uninvested.
If you are going to invest in bonds, do it the smart way. Don’t buy them individually.
Do: Stock Index Funds
If you have an extended time frame, 5+ years, then you should look towards increasing your risk exposure. Investing in a high-quality basket of stocks is a great way to maximize returns on capital you won’t need any time soon.
Numerous Stock Index Funds exist, but if you want a simple set it and forget it strategy you should look for funds that have a broad array of assets. Since Index Funds invest in assets that mirror various indexes going for some of the broader index measures may be prudent such as the S&P 500 or some of the Russell Indexes.
The Vanguard Total Stock Market Index Fund is often regarded as the fund. The stock ticker is VTI and has just about the lowest expense ratio in the market.
Placing your funds into VTI will give a broad exposure to the Stock Market in general. This means you don’t have to worry about picking specific investments or what the future may hold. Over a long term it is likely that VTI will continue tracking upward.
Don’t: Loaded Mutual Funds
The key to index funds being desirable is they have low expenses. This not the case with loaded mutual funds.
Loaded Mutual Funds charge a commission once purchased. If you are being shepherded into a loaded mutual fund it is likely that this is by a Financial Advisor that will benefit from you making the purchase. The chances that the fund you are buying into can beat its benchmark or a broad-based index fund over the long term is essentially 0.
Loaded mutual funds were designed to do 1 thing: make money for those selling them… not necessarily make money for those buying them.
Steer clear of loaded mutual funds… no matter what anyone says about their performance. The chances that you will end up into one that benefits you over a 5+ year period of performance is not likely.
Do Your Research
None of what has been presented should be considered investment advice. When making investment decisions you should involve professionals such as Financial Advisors who have the fiduciary responsibility to look out for your best interest.
Congratulations! You have a lump sum to do something with and you are actively trying to find a way to make the most of it. Understanding your investing time horizon and your risk level will help you understand what type of investment vehicle may make sense.
If you want to ensure the full amount is accessible in under 2 years then looking towards a savings account, CDs or even I-Bonds is a good way to go. The amount of interest earned will be small but the risk of losing your principle will also be small.
If you have a longer time-period to work with then Bonds or even Equities in Index Funds should be considered. The risks for these assets go up much more, but so does the potential return. Over the long run these will appreciate much more than safer assets. In any single year or two they may go down tremendously.
I hope you enjoyed this article! If you have any comments, questions, or concerns please feel free to throw them down in the comments section below.