At some point in our lives, most of us will have a lump sum to invest and while this is a nice problem to have, most of us will spend all the money and then regret it.
Those that don’t will usually just put the money into a bank deposit account.
If you want some tips and ideas on what you should really do with your lump sum, then read on.
What Is A Lump Sum?
Wikipedia defines a lump sum as:
a single payment of money, as opposed to a series of payments made over time
Personally, I would define a lump sum more simply as
a large sum of money!
As far as I am concerned, we don’t need to concern ourselves with “payments” i.e. how you came into the money.
I’m hoping here that you’ve not robbed a bank or anything else illegal!?!?
Phew! That’s a relief!
If you have a lump sum burning a hole in your pocket right now, you have probably got it from one of these sources:
- Inheritance when a relative leaves you money or property in their will;
- Property sale;
- Business sale when you retire or exit a business to start a new one as an entrepreneur;
- Divorce settlement;
- Bonus from your employment;
- Redundancy payment from your employment;
- Retirement lump sum from your pension or retirement account when you retire;
- Lottery win!
Sorry, but I just had to include the last one – unlikely as it is, somebody has to win and why not you?
What To Do With a Lump Sum
So you are sat there with your large sum of money and you are wondering what to do with it?
Well, at a fundamental level, the choice is whether to spend it, save it or invest it.
The vast majority of people, as I have said, just spend it all.
That is fine if it is a relatively small lump sum and you have no debts and you have an emergency fund set aside for a rainy day.
Otherwise, your first priority should be to clear as much of your debts as you can and only spend a little of it on treats.
If you have cleared your debts, but you don’t yet have at least 3 months of income set aside for emergencies, then this should be your second priority.
After these short-term needs are sorted, if you have any of your lump sum left over, then after allowing a bit more for a slightly larger treat e.g. a holiday or something for the home, children, car, etc.; it is time to consider the longer-term by investing the rest.
Where To Invest A Lump Sum
When it comes to investing a large sum of money, you need to consider 2 things:
- How much risk are you willing to take with your money?
- How long until you need the money for something e.g. retirement?
If you are frightened of losing any of your money and you want to get it all back in future then you should forget about collectibles like wine, art, etc. and the stock market and find a bank deposit account of some kind to park the money until you need it again.
Regular savings accounts will pay you more interest if you can give them more notice of any withdrawals you might want to make.
These are also the best choice if you are risk-averse and need a regular income from your money right now.
Alternatively, if you don’t need an income yet, then you can put the money into a fixed-term deposit account, also called fixed-term bonds, certificates of deposit (CD), etc.
Again, the longer you can tie your money up for, the higher the interest rate you will get but you won’t receive any of that interest while the money is on deposit.
Essentially, that’s because you are telling the bank that you will not be withdrawing the money for a certain period of time, so they can go ahead and lend all of that money to someone else (which is how the bank makes its money).
If you are able to squirrel some of the money away for retirement, there can be major tax advantages (i.e. FREE money) available from contributing to your pension or retirement account.
This is a complicated area with many alternatives depending on where in the world you live so you’ll probably need some independent financial advice if you are planning to do this.
If you are willing to take more of a risk, at least with some of your lump sum, then you have the potential for bigger returns if you are investing long-term (10 years or more).
Investing in shares is higher risk than saving money in a bank but it is the method most often used by professional investors and fund managers looking after your pension or retirement account!
That’s because the returns from company shares held on the stock market have been shown to beat savings, bonds, etc. over the longer term.
When you think about it logically, that makes perfect sense because owning shares is about owning pieces of real businesses.
Businesses are the way that entrepreneurs make their money and are the way that non-entrepreneurs i.e. employees earn their living too.
So businesses are the engines of capital growth which provide jobs, investment and pay taxes for Governments to spend.
Businesses are inherently focused on growth and take years to get started, become successful by developing a formula or system (a business model) and then exploit that approach to generate growth.
Investing in company shares is the way that those of us who can’t afford to buy a whole business and don’t want to be an entrepreneur, are able to hitch a ride on the back of someone else’s efforts.
And that sounds good to me.