A friend and reader of this blog posed an interesting scenario to me this week.  One that I, or almost anyone else for that matter, would be rather shocked to see waiting for them in their email inbox prior to their ritualistic 8 AM cup of java.

Matt – What would you do right now with $100,000?  I visited a financial adviser yesterday and I’m not sold on his advice.  What should I do?

Granted, I don’t know Christine all that well, but I was taken aback by such query.  Not because it is that difficult to answer, but because this isn’t the type of email request that I get on an everyday basis from a little blog like this.  However, I certainly appreciate her faith in my advice.

Being somewhat of a smart ass, I jokingly asked if she recently started her own personal escort service and why I haven’t been given a discounted rate.  Of course, this got a laugh and a “Get Serious, I Need Help” reply, which resulted in a fair trade for my financial IQ and her permission to write a quick blog outlining our Q & A session.

For the record, I’m not a certified financial planner but I spend the majority of my time as an independent trader, and from our prior conversations, she is well aware that I spend 12 hours a day (minimum) tracking the stock market.  Knowing this, she asked for my advice.

However, the vast majority of the questions I posed to her did not focus on picking stocks, mutual funds, or anything of the kind.  I wanted her to focus upon details that she might have overlooked before writing a fat check to her online broker.

In other words, I wanted to get her thinking about proper wealth management by building a solid financial foundation first, then focus upon growing her money.

Christine’s background information

Naturally, I needed some background information on her personal finances to create a basic foundation of her economic standing.

Christine is 31, single, and has no children.  She does plan on starting a family someday.

She brings in a rather generous salary of approximately $85,000 per year.  [golf clap]

She has no “bad debt”, but has a few thousand dollars remaining on an auto loan (which she paid a 75% down payment) for the single purpose of boosting her credit score prior to buying a home.  Having just recently opened up her first credit card account at age 31, this is probably a good idea since she does not have a long history of repaying her debts other than basic utility bills or cell phone payments.

Having some investment experience, Christine has built up a substantial brokerage account by regularly investing her disposable income.  Her current mutual funds are worth approximately $120,000, so she is not at all hurting for an immediate source of additional income.

She is currently renting an apartment, but before we accuse her of throwing her money away, renting is justifiable since Christine moves quite frequently and has lived abroad for years at a time.

Before you think she’s a golden goose or that I’m making her up out of thin air, there is a chink in this financial diva’s armor – she has no 401k or Roth IRA!  For whatever reason, she decided to go solo on her retirement options or has not read into the benefits of having tax deferred growth in her retirement plan.

All in all, she is in a very enviable financial position.  Bravo!

The Thought Process… Today, Tomorrow, and 30 Years Out

When considering what to do with such a large sum of money, it will often intimidate to the point of hesitation.  Which is exactly what Christine has done by putting this money away in a FDIC insured savings account until she determined what to do with it.

While she seemed slightly annoyed by her hesitance, I’m quite pleased that this was her first response.  Patience and safety is far better than impetuous behavior any day.

Here is my list of questions that I posed to her in sequential order:

Questions for Today

1. Where did this sudden cash infusion come from? If you won the lottery or got this from an inheritance, chances are good that your favorite charity – The IRS – would like to meet with you and discuss your new found fortune.  If it’s a large sum of cash, consulting an accountant would be a wise first move and get an estimate on your total tax liability.
2. Do you have any immediate financial needs? If so, these funds should go directly into a savings account until you need to access these them.  Examples would be replacing an aging car, repaying medical bills, etc.
3. Do you have an emergency fund? If not, this is a perfect chance to create one.  Most people consider 3 months of living expenses to be suitable, but I generally keep 6 months to keep on the precautionary side of things.  We are entering a recession after all, and it never hurts to be safe.
4. Do you have any outstanding debts? High interest rates are the bane of my existence, so anyone paying greater than 7% on any type of loan should be paying it off as quickly as possible.

Questions for the Short to Intermediate Term (1-5 years)

1. Do you own your own home? I firmly believe that everyone should attempt to own their own home as long as they have the financial means to do so.  A sudden cash infusion like this could easily be justified as a down payment on a home, not to mention, giving you some increased leverage when negotiating with mortgage brokers.  You would almost certainly get a better interest rate and save tens of thousands of dollars on interest related fees over the lifetime of the mortgage.
2. Do you have out of the ordinary responsibilities? Sadly, some people have uncommon responsibilities such as caring for additional members of their family.  For example, it’s not a far fetched idea to suggest that some young adults will be giving aid to parents who made poor investment choices or will struggle with rising cost of healthcare.  If this is a reality, it might be a wise idea to hold back some cash to pay for their expenses instead of locking up 100% of this newfound money in illiquid assets.
3. Are you saving for something special? Whether you want a flatscreen TV, a trip to the Great Wall of China, or whatever your heart desires that would have taken years to save for, now may be a good time to consider spoiling yourself.  Money isn’t everything, and you can’t take it with you when you die, so enjoying yourself within reasonable limits is perfectly acceptable.

Questions for the Longer Term (Ideas for 30 years out)

1. Are you maxing out your retirement accounts? If not, now is a great time to start.  Opening a Roth IRA though Vanguard or Fidelity takes less than 10 minutes, and if you’re not using your employer’s 401k plan with matching contributions, you are simply throwing away FREE money.  I would even go so far as to recommend you maxing out your 401k and using this extra cash to supplement any shortfalls in monthly cash flow just to get the tax deductions on your salaried income.
2. What does your investment portfolio look like? If you don’t have one, and you still have leftover funds after running through the preceding questions, it would be a good time to consider investing in the stock market.  If you have a long time horizon, and don’t need this money back anytime soon, it would be wise consult a financial advisor or trusted “someone” that you may know to learn how to put this money to work for you.
3. Have you considered alternative investments? Investing in real estate is a well known path to building wealth, and perhaps you could consider buying an investment property and becoming a landlord.  Perhaps you could start a business that parallels your hobbies?  Even microlending via companies like Prosper and Lending Club is becoming more mainstream with those looking to share the wealth once hoarded by the credit card companies.  The main point being that it pays to diversify and have multiple income streams flowing in just in case one particular area goes cold for an extended period of time.

After reading through this list, I’m sure there are multiple tangents that could be addressed depending upon your individual circumstances.  Remember, this is a list of generalized questions that should get more than the impulsive side of your brain awakened.  Or at the very least, impress upon you that this situation requires more than two seconds of brainstorming, and should only be undertaken after a substantial amount of thought.  If you’re confused, just wait and sit on the sidelines like Christine until you figure out what solution is best for your needs.

Again, patience in this type of scenario can’t be stressed enough.

As for Christine, I feel the most important advice I could give her is to continue along the stellar financial path she has set for herself and immediately begin taking advantage of her employer’s 401k program.  I also advised her to immediately setup a Roth IRA through Vanguard.  The tax advantages are simply to huge to pass up. Additionally, I think that once she finds a city she enjoys, she should allow herself to grow some roots and buy her first home.  Even if she moves, she can rent out the property and indulge in the equity appreciation as time progresses.  Maybe she can even turn a monthly profit from rental income.

* * *

If you feel I have left out an important step in this process, or you have additional ideas to assist Christine, please leave a comment to share with the group.  Both she and I would be most appreciative.

To Christine, thanks for allowing me to share your questions and I hope this helps with your decision making process.

To anyone else with financial related questions, please feel free to drop me a email anytime.

Photo by kudaker

Share

Save

• Best Reads & Gauging America's Animosity Towards the Big Three Automakers
• Study shows Women Saving Less than Men for Retirement!
• Investor Panic Sets New Records for Investment Firm Websites and Call Centers
• 5 Lessons Potential Home Buyers Can Learn from Median Income vs Median Home Price

• Using Whole Life Insurance to Create a Pension Income Stream
• Can You Afford To Buy A New Home?
• Start Saving Money Today
• Spending Money On Kids At Your Own Expense