Imagine waking up one morning to find a letter in the mail, stating that you won a contest and suddenly have $30,000 to spend or save anyway you want – and even better than just $30,000, it's $30k that's tax-free. Or perhaps, you've managed to save $30k on your own by diligently tucking away extra dollars. Either way, knowing the best way to invest the funds is always tough. The good news is that no matter how you invest it, it's better than spending it on frivolous items you don't need.
Pay Off Debt
Pay off any credit cards or high interest rate items you still owe. If you saved the $30k, you may not have debt, but if you find yourself with the gift plopped into your lap, think about doing this before you begin to invest. If your credit card charges 10 to 25 percent, you'd be hard pressed to find an investment paying as well. By paying debt first, in reality, you're making that interest when you save yourself from paying and you don't have to pay taxes on the money you make.
Build an Emergency Fund
You should always keep three to six months of bills tucked away in the event of emergency. If you paid off high-interest debt, it means you don't have to put away as much money for emergencies. This should be in short-term laddered CDs or savings.
You ladder CDs by making certain that one comes due every month for three to six months. That way, they're available if you need them.
Create an Asset Allocation
Diversifying your account by dividing the balance into several different investments is a way to reduce the overall risk of your portfolio. Asset allocation is a method of investing where you put some funds in bonds, some in stock and some in fixed investments, such as CDs or bank products.
The younger you are or the further down the road you'll need the money, the more risk you can take, which means, the more you can invest in the stock market. If you're 20 to 30 and want the money for retirement, use the emergency funds as your bank products, and then divide the balance. Ten to 20 percent should be in bonds or bond funds, and the balance should be in stocks or stock mutual funds.
Diversify Investments Within Asset Classes
Even if you put 50 percent in stocks and 50 percent in bonds, you wouldn't be safely invested if the stocks and bonds were all for one company. In fact, you'd expose yourself to a bunch of risk. It's like the old saying, "Don't you put all your eggs in one basket."
Mutual funds are one way to diversify and so are ETFs, or exchange traded funds. However, you also need to make certain you have a mix of various sized companies, ones in several different industries and a mix of those that give dividends and those who invest profits back into the company.
When you look for companies of different sizes, you'll find funds called large, mid and small cap. Cap stands for capitalization or how much money they have. Value and growth stocks differentiate how they deal with company profits, normally.
Rebalance Your Assets Regularly
If you have a large cap growth fund that went crazy and grew 32 percent and a bond fund that went south, you'll need to get back to the original blend you set. You sell off some of the investments that grew and invest in those that didn't. This way, you're always selling high and buying low. You're also maintaining the balance of assets you felt were the best in your situation.
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