Hi there income streamers! I’ve been receiving some questions recently about a good problem to have. It appears some of us have been doing a great job earning and saving, and have happened upon an EXTRA chunk of change out of the blue! These surprises can come in the form of a class action settlement, bank bonuses, gifts, inheritances, and more. So what do you do with it?
For the regular Joe the answer is first paying down consumer debt. A guaranteed investment return of 10+%, which is a common interest rate for consumers debt, is a must-take every time. Once that is done, it’s important to establish an emergency fund at some sort of high interest rate bank like Ally. This fund should cover 2-3 months of living expenses. That way, you can achieve some financial stability in the face of uncertain economic times, and this security will aid both performance at work as well as avoiding panic-selling of stocks.
But, for the regulars here, you have done both these things, so the next option can seem like an easy answer: pour it into a retirement account. Every dollar saved is going to be an extra 4 cents of passive income every year and cuts out that much more working time thanks to financial independence. But many of you may have already maxed out your retirement accounts. So what next?
You have a couple options now. The money could go toward a post-tax brokerage account, earning 7% real return that is chopped a bit by a 15% capital gains tax. You could pay down a mortgage, but considering that mortgage interest rates can actually run below inflation, and that their payments can be a net positive when accounting for tax benefits, that may not make sense. A third option would be to invest in your earning potential, either through education and certifications or by starting a business.
Considering the size of the windfall, I think a great first step is to consider the options I present in How to Invest Less Than Fifty Dollars. Spending it on things that can save you money, like replacing lightbulbs or insulating your home, can have a 10+% return, beating pretty much every major form of investment! If your home and car are already running at peak efficiency, though, I think the next step is the third option mentioned above: investing in yourself. Taxes can eat up a majority of the returns on post tax investments, whereas training and certification opens up opportunities for a more satisfying and highly compensating career. If returning to school sounds scary to you, consider paying for just one class to dip your toes in. I’m sure that once you realise no one is judging you, you’ll pursue this savvy and satisying financial step.
To sum up, priorities for investing a windfall should be paying down consumer debt, establishing an emergency fund, maxing retirement funds, spending on cost reduction, career advancement, and THEN considering post-tax investment. This order provides the most stability and highest return.
Do you agree? Would anybody like to brag about their windfalls? Please let me know in the comments!