Simon Says: How to Handle a Windfall in Your 20s

Simon Zhen

By , Staff Writer
Posted on Fri Dec 20, 2013, Last Updated on Fri Dec 20, 2013

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Simon Says: How to Handle a Windfall in Your 20s

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When a large sum of money suddenly becomes available to you, it’s hard to resist spending it on extravagant purchases. Those who are able to leave the money untouched may recognize that investing their windfall can provide financial security into the future.

Q: My mother passed away recently and I inherited about $50,000 in cash. Right now, it is held in a regular savings account, where it has been for about half a year. I’ve been trying to keep it out of my mind so that I don’t spend it all, which is probably difficult for most other people in their 20s. I know should I should invest it somewhere. Should I put the money into CDs or a tax-advantaged account?

- Jack B.

A: Jack, it was a good idea to stay away from the windfall and take some time to let it sink in before doing something with your newfound money. It’s far too easy for someone to quickly squander money that’s suddenly fallen into their hands.

First off, if you don’t have one already, it is always a good idea to have a small amount of cash available at a moment’s notice. This emergency fund should be equal to 3 to 6 months of monthly expenses (i.e., rent, utilities and food).

Ideally, the emergency fund should be stashed in a high-yield online savings account. I’d suggest an established online bank that has a history of maintaining competitive savings rates — Ally Bank, American Express Bank, Capital One 360 and Sallie Mae Bank are solid choices.

If you want to stay away from the stock market, certificates of deposit (CDs) are viable options, but don’t expect interest earnings to be much more than what you’d receive from a savings account.

Also, it’s advised that you place a good portion, if you have remaining money, into a tax-advantaged account. If your employer offers a 401(k) retirement plan with a contribution match, you should put in enough money to get the maximum match.

Then, you should open a Roth IRA — if you haven’t done so already — and contribute up to the limit (for 2013 and 2014, the maximum is $5,500).

If you still have money left over, you may want to increase your contribution to your 401(k) plan. As for the type of investments to choose for your retirement accounts, index funds and target-date funds are simple and diverse funds that are becoming increasing popular for investors of all ages.

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