What Should you do with a Lump Sum?

This has come up with some clients recently, so I figured I could write about it while I’m working through this with them. 

So the basic scenario is you received a large, lump-sum windfall– whether that be from an inheritance or selling a home. The first and most important step to take is to not rush into doing anything with it. This is especially important if you’ve inherited money after the death of a loved one- you are emotional right now and should not rush into any large decisions for at least a few months. Park that money in a high-yield savings account and spend some time just having it. This will give you some clarity on what you want to do with it and allows the shock of a large bank account balance to dissipate.

If you have high-interest, or non-deductible debt like a car or personal loan, I’d recommend you use the funds to pay those off. The high-interest rate means it’s working against you every day and will take you a long time to pay off if you keep it hanging around. 

Let’s say you don’t have any high-interest debt or another immediate use for the funds(<3 years to use the funds), and would like to earn a higher return than your average savings account. In that case, it often makes sense to invest the proceeds. I would recommend you utilize “dollar cost averaging” to slowly invest the funds. This means you set up an automatic transfer on a monthly basis for a predetermined amount, and set it up to buy into a diversified portfolio in any type of investment account (IRA, 529 college savings, or just a regular taxable investment account).  

Research has shown that taking advantage of dollar-cost averaging leads to enhanced returns over time because you are buying investments systematically and removing the emotion of the stock market highs and lows from the process. This has the added benefit of automation, which means you’re more likely to actually achieve your financial goal and not get in your own way.

I hope this will help you begin to navigate the pitfalls of receiving a large sum of money at once. Reach out if you need further advice!

Financial Planning, Investing




What Should you do with a Lump Sum?

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