How to Invest Your $50,000
Your parents have saved to provide you with a comfortable future, that’s why they planned this whole inheritance thing. It’s your chance to take control of your finances and put yourself in a better position to reach financial independence.
Their gift to you is an opportunity, not an obligation. You can be the dutiful child and dip into your children’s inheritance, or you can use it to build a financially secure future.
Here’s what you should do.
Invest Cash in a Money Market Account
Laddering your bond portfolios is a smart way to invest capital every year for the right level of interest payments. As an investor, you can ladder three or four bonds with different maturities using a combination of Treasury and corporate bonds.
Whether you’re short on cash or just want a little extra credit cushion, consider investing for your short-term cash needs by opening a money market account. Money market accounts currently pay between .10% and .2% per year, but these rates do not maintain consistency and can change at any time.
In a money market account, your funds are typically invested in interest-bearing debt securities. You want the type of investments that you can redeem prior to maturity with little or no penalty, and you will likely find that most of the available money market accounts are set up as passbook, certificate, or sweep accounts. Often, these accounts come with restrictions such as a maximum amount of money you can deposit in a given period or restrictions on pre-authorized automatic withdrawals.
Money market accounts are a safe way to invest because they provide liquidity and have low risk. You will earn some interest, but at a rate that could be lower than you earn with a normal savings account or a short-term CD.
If you live dangerously, check out some of these riskier options.
Invest in Stocks
Stocks are considered one of the best investments for long-term financial success. They’re also very popular among new investors because there are many public companies traded on the stock market. This means you can buy a small share in the company. Stocks provide you with partial ownership of a company and the hope for future profits.
There are many benefits to investing in stocks. First, when you buy a stock, you own a slice of a business. You may not be able to help run the business, but you will share in the profits. One of the biggest challenges for small businesses is funding, and when you own a part of the company, you essentially co-own the business.
An investor can view this as purchasing a small ownership stake in a business. When the business performs well financially, the value of the investor’s shares go up. This means that the investor can sell the shares for a profit…or at least make back the original investment.
Second, you benefit from discounts. When you buy a stock, the price is usually discounted from the market price to make the investment more appealing. These discounts can vary based on whether the company is historical or newly IPO-ed.
Invest in a CD
We all want more money. Investing your money wisely is a sure way to achieve that. Of course, the definition of “wisely” is going to depend on you and your financial goals.
But one of the most solid baseline strategies to invest in is CDs. CDs are certificates of deposits issued by banks. They are guaranteed investments. Your money is locked up in the CDs for a period of time (usually around 6 months or a year), and the bank also pays a decent interest on it. It’s like a savings account, but a little more secure.
The great thing about CDs is that you don’t have to do any work once you’ve purchased them. They kind of work like an old-school punch clock; you put in your money and you get money back. The catch is, the money won’t be available until a certain time period passes. This is called the CD maturity date, and it is usually set at six months or a year.
CD Laddering is a common investment strategy that takes advantage of the CD maturation date. It helps you to gain a higher return on your investment without taking on a higher degree of risk. It’s basically putting your money into CDs with staggered maturity dates.
Determine Your Investment Allocation
Remember when your high school guidance counselor asked you to plot out your college major and freshmen classes? He was actually trying to map out your future career, and your college choices (and some luck) would determine your earning potential.
It’s important to first understand how your investments are allocated. This is called asset allocation and it’s the most important factor in long-term investing success.
Your asset allocation dictates how much you’re going to put into stocks, bonds, and cash. It should be based on your age, time horizon, and long-term goals.
Stock Your Emergency Fund
Most people have an emergency fund of some sort, but still manage to live right on the brink. Their reasoning is plain and simple: They prefer to spend their limited resources now, rather than setting funds aside for a rainy day.
In other words, they don’t believe they deserve a rainy day fund … they think they deserve to have their money spent on them, rather than saved for a rainy day.
However, if you believe that you don’t deserve to have an emergency fund – and regularly dip into your savings or investments to support your lifestyle – then you should read this article and learn why you’re doing it wrong!
Invest in Bonds
You can invest in bonds directly through the TreasuryDirect program. If you don’t want to evaluate and manage bonds yourself, you can purchase bond funds, which are mutual funds that invest in a variety of bonds.
Individual bonds are pretty straightforward. The risk is that the bond issuer will not pay you back and you lose your money. The reward is that the interest rate is higher than a savings account. At least if the bond issuer is highly-rated, it is very unlikely that they will default … and in the unlikely event that they do, your money should be protected.
The safest place to invest your money is in short-term bonds. If you invest in short-term bonds like Treasury bills or even CDs, your entire sum becomes available should you need it again. If you invest in longer-maturity bonds, your interest rate is higher, but you’re stuck with the bonds until they mature … or until the bond issuer goes bankrupt.
It’s important to note that different bonds vary in their risks. An AAA bond, for example, which is the highest quality bond, is actually more risky than a bond rated BBB since there are many more companies that are rated BBB than AAA. These kinds of nuances can mean the difference between a safe investment and one that lands you in the poorhouse.
What Could a $50K Investment Portfolio Look Like?
Everyone wants to make good investments, but how do you decide where to put your money? Should you rent out your money for interest, should you invest in stocks? Creating a balanced investment portfolio requires not only a thorough knowledge of investing but also a lot of time investment, which is why most people leave it up to the experts.
However, it doesn’t have to be an “all or nothing” dilemma. Whether you’re just starting out with your investments, or already have a well-balanced portfolio, it’s still important to know some basics about different types of investment strategies (and what is too risky for you) to guarantee your return.
Your long-term investment strategy is driven primarily by your age. The younger you are, the more risk you can take, and the bigger the reward potential. But as you get older, the opposite is true … the more conservative you should be with your investments.
Your time horizon also plays a big role. If you will need the money in five years or less, you’re not investing. You’re trading. You should keep most of your cash holdings in ultra-secure fixed-income securities. If you’ll need the money in seven years or less, you should still keep most of your cash holdings in ultra-secure fixed-income securities. Volatility and portfolio value should be secondary concerns.
Investments also make sense depending on your projected cash flow needs. We all want to make the most money in the shortest amount of time. Especially if we’re younger, and we’re playing for the long-term, like few years or decades. But if you have immediate cash needs (within one to five years), you might want to consider a high yield savings account or even a money market account