In the forums, this is a rather common comment. Someone gets an influx of cash and wants some advice. The response is pretty typical and simple to follow:
1. Pay off credit card debt
2. Pay off other high interest debt (maybe pay down extra on your mortgage or car payment)
3. Max out, if possible, this year’s IRA (Roth preferably, although the type depends on your situation)
4. Invest in the market (get an index fund, or spread it out between your current investments)
5. Try something new – start a business or just indulge yourself a little with a trip to Alaska – Innovate and enjoy it.
The flow is straight forward. Get rid of debt especially high interest debt like any credit card debt (C1). If you’re debt free, then don’t just go out and buy a $20,000 leather jacket. Put it towards retirement and invest the money for the future (C2). Of course, as many financial gurus will advise, don’t forget to treat yourself (C3).
Caveats 1 (C1): If you have a mortgage or car loan that you’re lucky enough to be paying only 2% interest on, then it could be more profitable to invest the rest of the money in an asset that is likely to return greater than 2%. Of course, taxes are always a major factor in this decision, and normally the tipping point to go in either direction is marginal, so the rule of thumb is pay down your debt (especially if it’s debt that you owe friends or family even if you’re getting 0% from that loan).
Caveats 2 (C2): Retirement before regular investing is always a good rule of thumb especially with options like Roth IRAs (a Roth is a type of IRA, and some people can get Roth 401(k)s). However, if you’re saving for a new house or car, then you might prefer putting this money into your preferred saving/investing asset for this purpose.
Caveats 3 (C3): When I say treat yourself, try to think on the level of a nice dinner. If you can treat you self by spending a fraction of that new money, put the majority to other use, and still feel good about it, then do that. Buy fancier coffee for a week or something similar. #5 mentions a trip to Alaska. Traveling is a great way to expand your horizons, and people don’t do this enough, but as with the fancier coffee for a week, try not to blow the whole amount on one thing for yourself. Although, if you’re just saturated in cash, then go right ahead, but I prefer some for of innovation. Whatever you do, keep it simple and don’t get anxious about what you should do. Lastly, try not to feel guilty if you don’t treat yourself much (unless you’re buying $400 shoes every month, in which case, you need to stop spending).