OK, So …I Have X Dollars – What Should I Invest In?

Thanks to careful savings, a lucky windfall or a well-deserved raise, you find yourself with some cash on hand and are not sure what to do with it. While there is no single answer, perhaps the most important part of the question is the variable – the actual amount (though it will depend on the person) makes a big difference in options for the decision.

 

Up to $5,000 – Save for Short-Term Needs: start an emergency fund. Everyone has unexpected expenses now and then, ranging from a slow paycheck to a sudden medical bill or other personal crisis.

The value will vary, of course, but most people should keep at least 3 to 6 months’ worth of living expenses in highly liquid form – physical cash, a savings account, redeemable bonds or a breakable certificate of deposit.

Sure, these may not yield much, but it is not worth trying for a few more dollars per year at the risk of not having the money you need when you need it.  Reaching for yield you might just stumble and fall.

Tip: consider I Bonds, but be wary of the one-year period in which you cannot redeem them and hold other cash while these mature.

$5,000 to $25,000 – Consider Intermediate-Term Goals: once rainy days are sufficiently factored in, you may find yourself with enough funds to warrant looking into longer-term investing options. But be careful: while retirement investing is essential and earlier starts beat late ones, it is critical to keep in mind what your time horizon is.

If you are saving for a near-term goal like a car next year or the down payment on a house in a few years, consider sticking to the same vehicles mentioned above for emergency funds and possibly short- to intermediate-duration bonds as stocks are simply too volatile for meeting more immediate needs.

Tip: tax-exempt bonds work well for non-retirement goals as they are generally free of federal, and sometimes state, taxes – just be sure to match duration to need.

$25,000 to $100,000 – Start Long-Term Planning: with shorter-term needs taken care of, it is time to think about how much you can set aside for long-term goals like retirement. There is no rush – take your time, understand the risks, read and read some more. Over a ten-, twenty- and especially thirty-or-more year time horizon a few months of return will not likely matter much either way – having a poor plan or one you fail to stick to, however, might be a big deal by comparison.

For most people, a few broad-market stock and bond index funds are a good start. Consider avoiding country- or industry-specific funds or ETFs, broaden your scope, focus on simplicity, tax- and cost-efficiency.

Tip: find a diversified, balanced and risk-suitable allocation and stay the course – set-and-forget is a great approach to simple investing.

$100,000 or More – Stop, Look and Listen: at some point, you might find yourself the recipient of a windfall that dramatically changes your financial situation. Instead of simply putting it into your existing plan, this can be a good time to revisit your need and ability to take risk.

For some, it also means looking at diversification beyond stocks and bonds since the resulting portfolio may be of a scale at which real estate or commodities could start to add more relevant diversification benefits.

For others, it could suggest a shift away from stocks and toward bondsor call for an annuity of some kind. Most of all, though, as Jack Bogle likes to say: hurry up and wait – let the impact of the change soak in and avoid making rash decisions.

Tip: put the money in a CD for the short term while you consider your options – this automatically defers the decision to avoid rash choices.

Conclusion: With all of the advice to get started on retirement savings early, it is easy to lose sight of the fact that we may need funds – even those we have carefully squirrel away – well before retirement. One of the most common mistakes new investors fall into is wanting to put money in stocks before looking at the big picture and considering what they may need next year, next month or even tomorrow. So before you jump in, make sure you match the duration of your needs with your money and avoid taking long-term equity risk for short-term goals. Start with the small things and work your way up!

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