A reader with a five-figure windfall asks where he should invest the cash. Handling a sudden influx of cash can be tricky, especially in this market, but the first rule of thumb is: Don't do anything rash.
Q: I've recently inherited an asset from a loved one valued at more than $50,000. Where is the best place to invest the money?
A: Even if you never hit the lottery, at some point in life many people find themselves on the receiving end of a large amount of cash. For example, people like yourself may inherit money from a loved one’s estate, or a company in which you own stock may get taken over in an all-cash deal.
Handling a sudden influx of large amount of cash can be tricky. The first rule of thumb: Don’t do anything rash. Park the cash in a safe place, such as a money-market account or a short-term bank CD while you figure out your long-term plans.
Next, consult a financial planner or tax advisor about the tax consequences of your sudden windfall. Before you do anything with the windfall, you need to make sure you have enough set aside to handle the tax bite.
Once you know you have enough set aside to pay the tax bill, consider paying down high-interest credit-card debt first. The national average interest rate for credit cards is hovering at just above 14 percent, according to data-tracking company CreditCards.com. (The average leaps to more than 20 percent for those with bad credit.) By paying down all of your high-interest debt first, you’d earn an immediate double-digit return on your money -- a yield you’d be hard-pressed to find anywhere these days.
If you have a considerable amount of cash left over after paying down your high-interest debt, consult a financial planner before deciding to pay down any other types of debt, such as a mortgage or student-loan debt. With rates so low, your cash may work harder for you elsewhere.
To determine the best place for your funds, take a look at your financial goals. A big infusion of cash may mean that some of your goals, such as saving each month for college for your children, may no longer be necessary. You may be more interested in preserving wealth for your retirement or for your heirs. Once you have a new set of goals in place, work with your advisor to choose investments that will help you reach them.
If you inherited an investment portfolio, its allocation between stocks, bonds, and mutual funds may be quite different from your own holdings. If the allocation of an inherited portfolio doesn’t match the goals you’ve set, rebalance your investments by selling off some assets and buying others. (Your financial advisor can help you figure out the tax implications of selling these assets.)
Sad stories of lottery winners who wind up penniless are all too common. Most of these riches-to-rags tales are the result of splurge spending on a variety of big-ticket toys such as luxury cars, cruises, second homes or yachts. The best way to avoid losing your new-found wealth is to keep your goodie count low. Careful planning can help you figure out just how much you can spend on fancy toys without damaging your financial future.