Within the world of mutual funds and ETFs, one popular option is index funds. Rather than having a manager who actively picks stocks and make trades, index funds attempt to track the performance of a single market index.
The result is that you can easily and often cheaply invest in a wide range of companies. This provides you with some protection in case certain companies or sectors of the economy struggle. Index funds tend to outperform actively managed funds over the long term.
The truth is that trading individual stocks is time-consuming and risky. While there is potential for big gains, there is also potential for big losses.
REITs are particularly popular and allow you to invest in real estate without buying any property yourself. If you live in a very expensive area like New York or Los Angeles, consider purchasing a property outside of your city or even out of state. Just make sure to first speak with an expert, like a financial advisor, for advice on how to best set up and manage your finances. The simplest way to save your money is in a savings account. Most big banks offer very low interest rates on their savings accounts think 0.
Instead, look for a high-interest savings account. A money market account MMA is a similar option, and interest rates for MMAs are typically higher than for savings accounts.
Another safe place to park your money is in a certificate of deposit CD. A CD has a set term, ranging from a month to up to 10 years; you cannot touch your money until the term has elapsed. The trade-off for this reduced liquidity is higher interest, and longer terms generally have higher rates. CDs require you to give up access to your money for a while, but they offer a guaranteed payout.
And so long as the bank is FDIC-insured, your money is safe. Instead, consider spacing out your investments over time through a strategy such as dollar-cost averaging. Dollar-cost averaging is a simple investing strategy where you invest a fixed amount of money at regular intervals.
The advantage of spacing out your investments is that you face less risk of spending all your money on an asset while it has a high price. While markets go up over time, corrections and even crashes do happen. By spacing out your investments, you mitigate this risk.
As you might imagine, dollar-cost averaging is most useful for assets that see regular fluctuations in price.
You can park it somewhere safe, like a CD or high-interest savings account, or you can take a little risk and invest in the stock market. If you go the investing route, you can choose how much risk you want to assume. These are less expensive than traditional financial advisors, but offer a similar level of service. View our list of the best financial advisors. Once you've determined how you want your money managed, time is of the essence to start putting that money to work in the market.
The kids can get scholarships or loans, or work their way through school; similar opportunities aren't available to retirees.
Learn more about how to prioritize your financial goals. You might consider private equity. Employer-sponsored retirement plans, such as a k or b , and individual retirement accounts, such as Roth or traditional IRAs, can help shield tens of thousands of your dollars from taxes. Learn more about the differences between IRAs and k s.
Our investment strategy road map can guide your investing journey. A couple specific situations may require immediate action in order to avoid unwanted attention from the IRS. These scenarios include:. I liquidated a k when I left a job. You have just 60 days after an employer cuts you a check to get that money saved in a workplace retirement account into either a Roth IRA or a traditional IRA. Read more about how to roll over a k to an IRA. The rules about what beneficiaries can and cannot do vary, as does the timeline for taking action without incurring penalties or triggering extra taxes.
It all depends on your relationship to the deceased surviving spouses have different options than other beneficiaries , whether or not the former owner had started taking distributions before they died, and the type of IRA Roth or traditional.
Just as you don't want the IRS to come knocking for your money, don't lose it all to fees. Even a small extra fee can take a huge bite out of investment returns. The fix? Invest in low-cost mutual funds and exchange-traded funds as opposed to paying the higher price for actively managed funds. Take an asset allocation snapshot. Look at the overall mix of investments you have in all of your accounts, including current and old k s, IRAs, taxable brokerage accounts, bank accounts and so on. If so, then you probably know what some of your options are already.
However, if you are new to investing, then you may want to start with some research. In any case, there is no one "best way" to use this cash; there are many options. As with any other financial decision, your job here is to choose the investment vehicle —or combination of vehicles —that is right for you. Cited below are some of the best options for your cash that you might not have considered, or which you may want to reconsider.
Although perhaps not the most exciting prospect, consider paying off your mortgage if you have one. If you do not own your home or another investment property, then do think about investing in real estate.
Real estate can be a solid investment, but it is complicated; it requires that you do your due diligence. You also can put your extra cash into taxable investments. The advantages are that when you decide to withdraw your cash, this money will be tax-free because the principal that you invested has already been taxed. However, any money earned on interest, capital gains, or an increase in the initial investment will be considered as taxable income.
Among the more common taxable investments are stocks, bonds, mutual funds, and exchange-traded funds ETFs. Some of these instruments, like dividend-paying stocks, could generate periodic income. This approach might be particularly attractive today, as dividends and long-term capital gains receive favorable tax treatment relative to earned income and ordinary interest income.
However, if you are squeamish about investing in the market and want to be completely safe, you can invest the money in high-yielding certificates of deposit CDs or in a high-interest savings account. As of , the best rates for high-yield savings accounts are coming from the online platforms of various financial services firms whose names you might already know—such as Goldman Sachs, American Express, and Barclays Bank.
You can even find some websites that will aggregate and compare the options for high-yield savings accounts for you. Finally, if your pension plan is an individual retirement account IRA or a k , both of which are tax-deductible but not tax-free, you could look into opening a Roth IRA account, as the money drawn during retirement from a Roth IRA is not taxed. Deciding how to allocate this kind of extra capital involves weighing your options carefully, considering your short- and long-term financial goals, and being realistic about your own tolerance for risk.
As always, it is a good idea to seek the advice of a financial professional before investing. Internal Revenue Service. Portfolio Management. Debt Management.
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