Investing For Your Future Monthly Message
Barbara O’Neill, Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Ten Things to Do With a Windfall
Congratulations! You just received an inheritance or won a big prize and you want to use the money wisely to enhance your future financial security. Now what? Consider these ten suggestions:
Fund an Emergency Reserve- Set aside three to six months of living expenses in a safe and easily accessible account (e.g., money market mutual fund, money market deposit account, bank or credit union savings account, and/or short-term certificate of deposit or CD). This money won’t earn a high return but can easily be tapped to pay for costly unexpected events (e.g., disability and unemployment).
Eliminate Debt- Repay the outstanding balance on high-interest loans and credit cards. Start with those that charge the highest interest rate such as department and specialty store credit cards that typically have APRs of 20% or higher. After consumer debts are repaid, consider paying off a home equity loan or mortgage, especially if you are close to retirement and want to eliminate this expense beforehand.
Earmark Money for Short-Term Goals- Make a list of financial goals that are expected to occur during the next five years and set money aside to fund them in cash equivalent assets or short-term bonds. Examples include a daughter’s wedding in two years and a new car in four years. Avoid equity investments (e.g., stocks or stock mutual funds) for short-term goals due to their high volatility.
Earmark Money for Retirement- Fund a tax-deferred TSP, 401(k), 457, or 403(b) plan. The type of plan you choose will depend on your place of employment (e.g., a corporation or non-profit organization). Take withdrawals from the windfall to offset increased payroll deductions for employer retirement savings plan contributions. In addition, fund a Roth and/or traditional IRA up to the maximum annual contribution limit.
Earmark Money for College- Put money into a state-sponsored 529 college savings plan for anticipated education expenses. Large accumulations of up to six-figure amounts are generally allowed. For additional information about the characteristics of various state plans, visit the College Savings Plan Network web site: http://www.collegesavings.org.
Give Some Money Away- Make a charitable donation to organizations that you support and/or those that were supported by the person from whom you inherited money. Make sure that the donee is an IRS qualified 501(c)(3) non-profit organization. Another option is to make gifts to family members and others such as setting aside money to pay for a child’s house down payment or a grandchild’s education.
Invest in Capital Assets- For long-term financial goals other than college and retirement, consider investing in a variety of capital assets including real estate (e.g., a primary or secondary home, rental real estate, and REITs), securities in taxable accounts (e.g., stocks, bonds, mutual funds, and exchange-traded funds), and collectibles. Another option to consider is an annuity to convert a lump sum deposit into a stream of future income.
Invest in Yourself- Build your human capital, which can lead to future promotions or new career opportunities. Get a college degree or take courses or training workshops for enjoyment, career advancement, or to qualify to switch to a new line of work.
Remodel Your Home- If you plan to stay put, consider making home renovations like landscaping, a new deck or patio, and kitchen or bathroom makeovers that often have a high return on investment. Carefully selected home improvements can make your home more comfortable and result in an increased future resale value.
Make Memories- Nothing says that you can’t spend some of your windfall on fun activities and personal expenses such as gifts and travel. To make the most of your money, buy things that will bring joy to yourself and others. Examples are paying travel costs for a family reunion and treating a child or friend to a 7-day
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