A Checklist for smart ways to use unexpected cash.
Money Girl
275 MG How to Invest a Windfall
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And advice when you visit my blog by the same name smartmoostgrowrich.com. Sometimes you get a financial windfall, like a gift, inheritance, lottery payout or a tax refund and find yourself jumping for joy. But once the dust and excitement settles, you also find yourself wondering what to do with it. That's the situation for a reader named Amber W who asks, "I'm a full-time student being supported by my parents and they gave me $30,000 more than I need right now. I'd like to invest in and earn some extra money. What advice do you have?" Amber's in a pretty enviable position to have her education paid for by her parents and to have a lump sum of cash to live on. But unless her parents are willing to keep this gravy train flowing, Amber needs to manage the money wisely. Here are five questions you should ask yourself before you invest a financial windfall. The first question you should ask yourself before investing a cash windfall is, "Do I have emergency savings?" Having some amount of emergency money is critical for having a healthy financial life because no one can predict the future. You might have a large unexpected expense or a loss of income. Without emergency money to fall back on, you're living on the edge, financially speaking. So getting a windfall is the perfect opportunity to build up your cash reserves. I recommend that you keep a minimum of three to six months worth of your living expenses safe and sound in a high-yield bank account that's FDIC insured. Depending on your situation, you may need more, like if you have a shaky job situation, a large family, or a spouse who doesn't work. Amber asked about investing her excess money. Let's clarify the difference between investing and saving so you can think strategically about them. Saving is for money you expect to spend within the next few years and don't want to risk losing it. You save money that you want to keep 100% safe because you know you'll need it or because you could need it as with emergency money. Investing, on the other hand, is for money you expect to spend in the future, like in 10 or more years. Purchasing an investment means you're exposing money to some amount of risk in order to make it grow. Investments can go down in value, therefore you should never invest money that you can't live without. Though Amber is being supported by her parents, they're probably counting on her to make her education money last as long as it needs to. My advice for Amber is to save her windfall, not to jeopardize losing any amount of it in an investment. Once she's out of school and starts earning her own money, she can begin investing. But until then, her job should be to concentrate on her studies and develop a career plan. AT&T customers, switching to T-Mobile has never been easier. 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Ixcel figures out what your kids need more help with and recommends more topics to practice. Their videos, lessons, sample problems and learning games too. One subscription to Ixcel gets you all subjects and all grade levels. Membership started just $9.95 a month. It's no wonder Ixcel is used in 95 of the top 100 school districts. I think the positive feedback that Ixcel gives is really crucial when it comes to learning. So make an impact on your child's learning. Get Ixcel now and money girl listeners can get an exclusive 20% off Ixcel membership when they sign up today at ixcel.com/moneygirl. Visit ixcel.com/moneygirl to get the most effective learning program out there at the best price. AI might be the most important new computer technology ever. It's storming every industry and literally billions of dollars are being invested. So buckle up. The problem is that AI needs lots of speed and processing power. So how do you compete without cost spiraling out of control? It's time to upgrade to the next generation of the cloud. Oracle cloud infrastructure or OCI. OCI is a single platform for your infrastructure, database, application development and AI needs. OCI has four to eight times the bandwidth of other clouds offers one consistent price instead of variable regional pricing and of course nobody does data better than Oracle. So now you can train your AI models at twice the speed and less than half the cost of other clouds. If you want to do more and spend less like Uber, 8x8 and Databricks mosaic, take a free test drive of OCI at oracle.com/advanced. That's oracle.com/advanced oracle.com/advanced. Question number two is do I have high interest debt? If you have expensive high interest accounts like credit cards or payday loans, paying down your debt is the next best way to spend a windfall. Paying off a credit card that charges 22% is like earning 22% on an investment after taxes. That's hard to beat. So take the opportunity to use a windfall to get rid of high interest debt and stay out of debt going forward. Question number three is do I contribute to a workplace retirement account? Getting a windfall could be the ticket to increasing your contributions or to just getting started if you haven't been participating in a retirement plan so far. It's wise to always invest at least 10 to 15% of your gross income for retirement. Investing through a workplace retirement plan is an excellent way to automatically set aside small amounts of money on a regular basis. A 401(k) or 403(b) allows you to contribute money on a pre-tax basis and invest in funds chosen from a menu of options. You'll build wealth for the future, cut your taxes, and maybe even get some amount of employer matching. Question number four is do I have an IRA or individual retirement arrangement? Don't have a job with a retirement plan? Not a problem. If you have some amount of earned income or are married to someone who does, you can contribute to a traditional or a Roth IRA. Even if you do contribute to a retirement plan at work, you can still max out an IRA in the same year, which is a great way to spend a cash windfall. There are annual income limits on who can contribute to a Roth IRA, but there are no income limitations for a traditional IRA. And the fifth question you should ask before investing a windfall is do I have financial goals? After you've built up your emergency fund, whittled down high interest debt, and have money flowing into tax advantage retirement accounts, start thinking about using a windfall to make your financial goals a reality. Do you want to buy a house? Go to graduate school, take a trip around the world, use the same principles that I covered earlier, say for the short term, and invest for the long term. For instance, if you want to buy a car within six months or purchase a home within two years, don't invest the money because the value could drop at the exact moment you need it. But if your goal is to send young kids to college or to buy a business in 10 years, that's when it makes sense to invest a windfall. Unless you get a huge life-changing windfall, it's best not to go on a wild spending spree. Instead, use the opportunity to shape up your finances. And if you are lucky enough to receive a fortune, it's wise to seek professional and legal help to make sure you manage your new wealth as wisely as possible. If you have a money question, you can email me at money@quickandertietips.com or connect on social media like the MoneyGirl Facebook page or Twitter. My Twitter name is @laraatoms, L-A-U-R-A-A-A-D-A-M-S with no space. You'll also find me on Pinterest, Google+, and LinkedIn. I'm glad you're listening to change. That's all for now. 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