Whether it’s a tax refund or an unexpected bonus at work, there’s nothing wrong with an unexpected wad of cash in your pocket.
Your only challenge is figuring out how not to blow it.
Say, for example, you find yourself $90,000 richer from a real estate sale, like a woman who recently wrote in to Bankers Anonymous.
She’s already paid off her student loans and her car, so the cash is all up for grabs, and she’d like to make sure it grows at least enough to stay ahead of inflation.
We like the way BA blogger Michael lays out a plan for figuring out how to allocate extra funds.
First, he suggests laying out a “Risk” (stocks, real estate, etc.) and “No Risk” (cash, money markets, annuities, emergency savings etc.) bucket. The next important element to consider is time.
Do you need the money in less than three years? Pick from the no risk bucket.
Do you need the money within five years? Start leaning toward risky.
Could you part with it for over 10 years? Go crazy with the risk bucket.
The bottom line: “The longer her [money] has to stay tied up in that Risky bucket, the higher the probability that the money will be larger when she needs it,” Michael says. ” The key here, though – the really essential point – is to know ahead of time which money she can’t afford to lose because she’ll need it, and which money she can afford to risk, because she won’t need it, ideally until retirement.”
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