This guest post is written by Silicon Valley Blogger, who runs The Digerati Life, a general personal finance blog. I’m really honored by SVB’s contribution. Her blog was a major inspiration for me when I started Pilgrim and it still is. I’m sure you’ll enjoy reading this as much as I did.
So what do you do when life throws you a bit of good fortune? Let’s say for instance you inherit a sizable amount from a close relative. How would that change your family financial planning? Well, naturally, your thoughts may turn to investing. Now this scene is oft-repeated across the nation, involving folks who have no clue about how to invest money and who, up to this point, have no real savings to speak of.
It’s the same song and dance for millions of Americans across the country. We go to work every day, pay our taxes, gripe about the economy and those damn politicians, raise our kids and live life one paycheck away from homelessness. So imagine receiving $50,000 all at once – wouldn’t it be overwhelming? It’s an opportunity for your mind to race around all the things you need, want and simply thought would be cool; and for a few of us, we’d end up blowing that money six ways to Sunday at least three times over in our minds.
But now think about your family’s financial obligations, starting with your kids’ college funds. How nice would it be to be able to keep your kids from having to take out student loans? What if you could pay off your house? That would be $800 a month you could put into a savings account or an account at Scottrade, plus you’ll save a boatload of interest in the process. So what about the stock market?
Now if you’ve been listening to the news, it may appear that the stock market is a pretty scary place. One day it’s up, the next it’s down, and nobody seems to know when and where it’s going to end up. It’s one of those places that the average Joe now looks upon suspiciously since things got out of hand during the latest financial crisis.
On the other hand, think about how you could get a better return on your money if you thought about investing it over the long term, perhaps putting it aside for the next six years to be part of an investment portfolio, rather than socking it away into a safer, stable checking account, which by the way, you may be tempted to raid every time you want or need something.
To make heads or tails of how next to proceed with your newfound fortune, here are a few things to look into:
Create an emergency fund, if you haven’t already.
It’s common wisdom to have at least six months’ worth of bill-paying funds available in the event of an emergency. If ever there was a time to establish this fund, now would be it. If you’ve got $50,000 coming your way but don’t have any savings, why not deduct $12,000 (this is just an arbitrary amount) from your windfall and open a money market or savings account, say at an online bank like EverBank, which has higher minimum deposit requirements but typically higher interest rates? You can decide to link this to other accounts you have, for quick access. Or you can create an account at your local bank or credit union if you’re much more comfortable with face-to-face customer service.
Invest in a diversified mix.
You can get started with investing your funds by splitting the rest of the balance into stock mutual funds and bond mutual funds. While the earnings potential of this portfolio is a little less than what you’d get if you took a more aggressive stance, you’re managing your risks this way and protecting yourself against big losses.
Visit a financial planner.
If you’re not sure about how to handle a significant windfall, you may want to get a professional’s advice. This is one option to take, especially if you are used to a paycheck-to-paycheck existence and now have the motivation to improve your financial situation. With money in your hands, you’ll need a realistic budget and some motivation for sticking to it. You can certainly do all of this on your own, which would be the low cost way to go about it; but for those who feel the need for extra support in this area, seeking someone you can trust and are comfortable working with may prove helpful. (Read “How to Choose A Financial Planner.”)
Your financial advisor will likely suggest that you come back and see him (or her) after some months, the idea being that he or she can help refine your investment strategy and capitalize on your windfall by making more aggressive investments. They’re around to help you through the process of working out your financial picture. Use this opportunity as a way to learn what you can from your advisor and to get started on the road to a healthier financial life.