You may have come into a lump sum of money and are wondering how best to invest it. There are several options you could take, from buying a house to saving it for the future or keeping it aside from your children’s education. However, we’ve put together this guide on how to invest your lump sum wisely.
Receiving a lump sum can be a turning point in the life of anybody. A lump sum can come into your hands when one or more of your sources of income pays you a large sum. You may have come into it from selling a business, winning a lottery, received an inheritance or pension.
Whichever way you receive your money, you would need to invest in a viable source that would give you returns in the long run. Lump sum investments differ from other kinds of savings. While other forms offer gradual returns, lump sums generate more interest. Therefore, with the right investment strategy, you can work towards putting your lump sum to meet your priorities and also benefit from the additional interests.
Know Your Objectives
Before investing your lump sum, you must have a structure or vision for your money or investment portfolio. It’s not advisable to leave your money in liquid savings for long, or you may miss out on your money working for you. However, before you can make the step to decide the investments to follow, you would need to evaluate your objectives thoroughly.
What Are You Hoping To Earn And Why?
And suppose you hire a financial planner to help you with investments. In that case, they could ask you several questions regarding your objectives, like how long you would need the returns on your investment, how much of it you want to grow, and the level of risk you are comfortable with.
Lump Sum Investing
In lump sum investing, you immediately put all your money into work, regardless of the market and economy. If the market goes up from there, you’ll be glad you put your money in early because any purchases after that would be higher.
If the market goes down immediately after a lump sum investment, you will be in regret. However, you can’t predict the day-to-day movements of the market, but there is data from the past 100 years that the markets go up over time.
So, putting your lump sum when markets are going up puts your money to work as you take advantage of the market growth.
This differs from dollar-cost averaging (DCA), which involves periodically investing portions of your cash. Dollar-cost average is best for investors whose time horizons are not clearer and who have a low-risk tolerance. Lowering the average price you pay for shares is a better method to benefit from the market’s inherent volatility.
Best Ways To Invest A Lump Sum Of Money
If you’ve come into lump sum payment and are wondering how best to invest, first address your immediate financial needs and then work your way from there.
If you have a financial adviser, they will discuss the best investment options for your lump sum. However, the following should be a priority:
Retirement Plan
If yearly contributions at your company’s 401 (k) plan have been meager, imagine what a $19,000 investment would do to your retirement plan. What grows investment is compound interest, so the more money you invest in your 401(k) plan, the more your money grows. Also, contributing to your 401k plan is a tax-advantaged investment, meaning you’re not taxed on your money until retirement. Also, your company will match a part of your contribution.
These are winning points for a retirement plan investor who has big plans in their retirement years.
Fund A Health Savings Account
A health savings account is a great way to shield yourself from the ever-increasing cost of health care. Investing a lump sum in a health savings account has several financial advantages.
First of all, they are tax deductible. Therefore, any funds you add to a health savings account grow tax-free. When you withdraw from your HSA fund on qualified medical expenses, the withdrawals are not taxed. In cases of a severe illness or injury, a fully funded health savings account can shield you and your household from financial losses.
Mutual Funds And ETFs
Instead of keeping money in an account, it’s best to invest in funds, especially equity-based funds like mutual funds and ETFs. Over time, we’ve seen that these appreciate in the long run. They are also easier than investing in individual stocks.
Mutual funds allow investors to put their money in diverse portfolios of stocks, bonds, and other assets. They are similar to ETFs, which allow investors to buy as many stocks or bonds as they want to at once. Both are great ways to gain access to some of the great companies in the world and to invest in their growth.
Try investing your lump sum in a broad ETF or mutual fund that tracks an index of stocks such as the S&P 500. With both, you don’t have to be bothered about one company’s failure in the market wiping out your portfolio. Click here to find more investment help.
Best Way To Invest A Lump Sum Of Money Final Thoughts
If you want to decide on the best way to invest a lump sum of money, find what works for you, as nobody can predict the future. If you have a low-risk tolerance level, it’s best to invest in a wide range of portfolio options, from stocks and bonds. If you want your money to work for you, you could stash your money in a health savings account or retirement plan that would yield interest over a long time frame.
Instead of letting your money sit with your money doing nothing, make lump sum investments to help you reach your financial goals.
Disclaimer
Information provided on InflationCents.com is for informational/entertainment purposes only. This information should not be considered as professional advice. Please seek a certified professional financial advisor if you need assistance. Rates and offers provided by advertisers can change frequently and without notice. We attempt to provide up to date information, but it could differ from actual numbers. Inflationcents.com may be compensated by 3rd party companies that are mentioned either through advertising, reviews, affiliate programs, or otherwise. All reviews and articles are based on objective analysis and no compensation will tilt our opinion. The author also runs a small Fishing Tackle online store at https://www.codaicenfishing.com
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