Congratulations! You got a winning lottery ticket. By the time taxes are deducted and you have paid off outstanding bills and debt, you cleared $10,000. What are you going to do with this windfall? Of course, being the responsible sort that you are, you are going to invest it instead of heading out to Vegas or Atlantic City. Why push your good fortune?
Here are some responsible paths you might choose.
- Blend Into Your Existing Portfolio – Add it directly to your existing portfolio. You can afford to tilt a windfall a little bit toward riskier stocks, but you want to stay reasonably close to your plan.
What? You don’t have a portfolio? Then….
- Start a Portfolio – Find the best balance between stocks and bonds based on your needs – and if you don’t have a portfolio yet, you probably need to invest more heavily in stocks to get higher returns. A good place to start would be to invest in a balanced fund with a blend of stocks/bonds that is tilted more toward stocks, or a fund indexed to the Dow or the S&P 500.
- Apply It Towards A Home – Use it as down payment money for a home. If you are renting but are relatively sure you will be staying in the area for some time and have a stable income, this could be an opportunity to buy a home and start building up equity.
- Open an IRA – If you don’t have one, you can start one. Actually, you can start two.
The maximum yearly contribution across all your IRAs is $5,500 ($6,500 if you are over age 50). You can start with a traditional IRA, then eventually convert to a Roth IRA that uses after-tax dollars and give yourself more options for distributions when the time comes to draw out your money.
- Add to Your 401(k) – If you have a 401(k) program that allows you to add to it, by all means add some of your windfall money and keep it in a tax-deferred status. You may have to do that by temporarily diverting more of your paycheck into the 401(k) and using the windfall to cover the expenses that part of your paycheck would normally cover.
- Consider a Health Savings Account (HSA) – If you ended up with a high-deductible health insurance plan that qualifies, you can contribute a portion of your windfall to an HSA. Assuming you use the funds for health-care expenses, they are tax-free. They roll over to succeeding years and can eventually (after age 65) be withdrawn for any reason tax-free and without any penalties.
- Education Expenses – If you have children or expect to have children soon, it is never too early to start saving for college. You can set up a traditional savings account, and when children arrive, start a state 529 program. By contributing early and often, you can build a substantial college fund for your kids while retaining significant tax advantages and flexibility.
You may also want to consider using some of your windfall to “invest in yourself.” Is there any specialized training you wanted to take, or a degree program you wanted to work toward? Investing in your education will presumably provide a tangible return through increased wages and promotions.
In short, there are many reasonable and responsible ways to invest a windfall. The right choice for you depends on your situation and the goals you have at this point in life. Meanwhile, consider keeping a couple of hundred indulgence dollars for yourself. You’ve earned it through your wise investment choices. However, under no conditions should you take your winnings and invest it all in more lottery tickets!