As a financial advisor, I see many people make mistakes when coming into a sum of money. Whether it's from a bonus at work, an inheritance, proceeds from a life insurance contract or winning the lottery, certain choices on how to use that windfall may be problematic. Mistakes like going out and buying a new car, boat, motorcycle or some other adult toy. The problem here is that these things depreciate in value, upwards of 40% in the first two years. Think of it like this: If I were to recommend a financial move that I knew – and so did you – was going to lose 40% of its value (your money) within the first 24 months, you'd think I was a raving lunatic! And you'd be right! Don't fall victim to temptation.
What I'd much rather have you do with that money is act as if you'd never received it and put it toward something of long-term benefit. For example, if you have a credit card with a 13% interest rate, paying it off is the same as getting a 13% return on that money. The same principle applies to any other debt, such as an existing car note, student loans, medical bills or your home mortgage. You could increase the contribution percentage to your 401(k) or, if you haven't maxed out your retirement contributions for the year, add it to your IRA to receive the tax-deferred benefits; if there is any left over after doing that, increase your emergency fund.
Other options would include purchasing an annuity for future guaranteed lifetime income during your retirement years; that way, you would have another guaranteed source of lifetime income in addition to Social Security. You could also buy a single premium life insurance policy that comes living benefits (benefits you may tap into should you ever be diagnosed with a chronic, critical or terminal illness or be confined to a nursing home facility or require in-home healthcare); this option would address a portion of your long-term care planning.
All of these potential choices guarantee a long-term benefit greater than the sum you've received. If you're a little more of a risk taker, you could simply invest your windfall in the stock market; just be aware of the potential for loss of principle.
The fact of the matter is this: it's just not as sexy to be prudent and disciplined, and Americans as a whole are prone to making instant-gratification-based decisions. But with counsel from a professional and proper prior planning, you can wisely use that financial windfall and maximize its benefits over the course of your entire lifetime, instead of just wasting it away in the moment until it's gone…like dust in the wind.
Bio: As the President and CEO of TZG Financial, Mike is doing what he professionally loves the most: building relationships and providing his clients with financial security. Mike has been featured in many publications, including Money, US News & World Report, The Huffington Post, Time, Reader's Digest, Men's Health, MSN and Yahoo Finance. He is a verified Top Contributor on www.moneytips.com, and is a member of both the National Ethics Association and the National Veteran-Owned Business Association.
Business email: SafeMoney@TZGFinancial.com