Smart Investment Strategies for Large Sums of Money

We recently receive a question from a reader who received a fairly large sum of money several months ago and he wanted to know the best way to invest it. The first thing I did was send him to the article we previously wrote about dealing with a financial windfall. Basically take care of the important things like taxes, then wait until you have come to terms with the large amount of money you received before deciding how to use it.

In the e-mails we sent back and forth, he mentioned he had already decided how to split up his money, including paying his taxes, donating some, paying off a few bills, helping some family, and a few other fun things (like I said, it was a large windfall!). When it was all said and done, he still had a decent amount of money to invest and wanted to know the best way to do that.

We went back and forth for a few more e-mails, and I gave him a few ideas which, with his permission, have been condensed into this article. The goal of this article isn’t to give anyone specific investments, but rather to get them thinking about their financial goals and how they can use their large sum of money to get there. Hopefully these tips will help you or someone in a similar situation.

Make Sure your House is in Order Before You Invest

Before you take the plunge and invest your lump sum of money into the stock market, take a long look at your financial situation and make sure you have your finances in order. Do you have any credit card or other high interest debt? Do you have an emergency fund in place? Do you have any large expenses looming on the horizon that you haven’t saved for (new vehicle, home improvements, college, vacation, wedding, children, etc.)?

If you don’t have any other debt, you have a solid emergency fund, and you have saved for any anticipated expenses, then you should definitely consider investing. If this isn’t the case, then I recommend paying off any high interest debt first, ensuring you have an emergency fund in place, then saving for any large expenses. There is no sense in investing if it leaves you open to debt now or in the future.

Set Investment Goals

Once you do that, you need to decide where to invest your money. Before deciding where to invest, I recommend taking a look at your short and long term financial goals and prioritize your investments based on your goals.

• Short term (within 5 years) – Do you have any major expenses coming up soon? Buying a house? Buying a car? Replacing a roof?
• Medium term (within 10-15 years) – Are you planning on paying off your home in the near future? Sending children to college?
• Long term (retirement) – Do you have any retirement investments or other investment accounts?

Basically, it’s a good idea to look at all your options before deciding how/where to invest, and keep an open mind – for example, it may be a good idea to split your large sum of money into a combination of short term, medium term, and retirement investing. You certainly don’t have to use it all toward the same goal.

How I Prioritize Investments

If I were in this position, I would at the minimum make sure I was out of debt, had an emergency fund in place, and had taken care of my short and medium term financial goals. I would also look at investing in a Roth IRA or other retirement account – for two reasons: you only get one shot at retirement investing; you can’t borrow your way out of retirement and you can’t play catchup as easily. The other reason is that in many cases, Roth IRAs have better long term tax benefits than many other investments. From there I would focus on maxing out other retirement accounts to take advantage of the tax breaks, then look at other medium and long term goals.

Where to Go From Here

Recommending specific investments is where I stop giving advice. Everyone has different levels of investing experience and different risk tolerance levels. Because of this, I recommend everyone do his or her own research before investing or hire a financial advisor to guide them through the process.

What would you recommend to someone looking to invest a lump sum of money?