When it comes to dream scenarios, virtually everyone has wondered and fantasized about what to do with a massive windfall. Whether it’s winning the lottery, getting an inheritance from a wealthy relative, or earning a fat paycheck, getting a million dollars out of nowhere would be quite an experience.
However, if you’ve paid attention to lottery winners over the years, you’ll notice that there’s a common thread - most winners wind up broke within a decade, if not in massive debt. Even worse, these people won millions of dollars, not a single million.
Since we wouldn’t want you to end up like those folks, we wanted to take this opportunity to share some of the best ways to invest, save, and spend $1,000,000. Although we're going to be practical, don't assume you have to save all of it. Go ahead a splurge a little - just be responsible about it.
Step One: Assess Your Needs
While it’s tempting to start spending right away, you never want to start buying things without a plan. The money will still be there next week or next month - you don’t have to use it all up immediately.
During this step, you want to div out where the money should go first and how much will be left afterward as "play" money. Here are some common considerations to think about when crafting your spending and investment plan.
During this planning phase, you should put the cash into a high-yield savings account or CD. As long as you can wait at least six months to a year before dipping into the funds, this is an excellent way to earn some extra cash before you even touch it. We’ll discuss CDs more in-depth later if you want to find out how to compare options.
First and foremost, not all debt is the same, so you shouldn’t pay off different kinds of debt in the same way. Some outstanding debts like a home mortgage can help you build equity and credit in the long run, so you don’t necessarily have to pay it off immediately, although it might make sense to do so.
As a general rule, any balance with a double-digit interest rate should go away as soon as possible. These can include credit cards, student loans, personal loans, and auto loans. However, if the interest rate is relatively low, and you want to build credit, you shouldn’t be in a rush to pay off all of your debt.
Another thing to remember is to avoid taking out new debt. Since you have so much money in the bank right now, it would be foolish to open new credit cards. Again, this is why the assessment phase is first - so you don’t rush into anything before you’re ready.
How much money are you putting away for retirement every year? If you’re well on track with a 401k and/or an IRA, you don’t have to put as much of your $1,000,000 into retirement. However, if you don’t have anything right now, or if your balance is much lower than it should be, you’ll want to allocate more of your windfall toward that.
One thing to keep in mind with retirement accounts is that there is a limit to how much you can contribute. The maximum annual cap for an IRA is $6,000 ($7,000 if you’re over 50). That number is cumulative, so if you have both a traditional and Roth IRA, it’s not an either/or situation.
Also, since a 401k is funded through your paycheck, you can’t actually put money from your windfall into that account directly. It has to come out of your paycheck, but it would make sense to max out your 401k from your paycheck and live off of the windfall.
Another point to consider here is how long you have before retirement. If you’re still in your 20s or 30s, then you have plenty of time for your money to grow. If you’re already over 50, you’ll want to div out how to maximize your nest egg in the coming decade.
Whether you have kids right now or are planning on having then in the future, saving for college should be at the forefront of your mind. To help you make the most out of your funds, we highly recommend opening a 529 Savings account.
These accounts allow the money to grow tax-free, as long as it’s used for higher education. Even better, the cash can also be used for peripheral items, such as textbooks or dorm rentals. Each state has its own rules regarding 529 accounts, so now is the time to do some additional research.
Again, if you have plenty of time (i.e., your kids are still in grade school), that will work in your favor. Since the account can grow over the next 10-15 years, it can potentially grow quite a bit.
Unfortunately, you have to name a beneficiary for the account when you open it, so you can’t start one for a child that doesn’t exist yet. That being said, you can name yourself or your spouse, and then change the beneficiary once your kid is born.
For many people, the first thing they want to do with a million dollars is buy a fancy new house. If you’re currently renting, the prospect of owning property does sound appealing. However, as we’ll discuss in our investment phase, you might be better off putting funds toward something like flipping a house or a rental property.
The unfortunate reality is that one million dollars won’t necessarily pay for a new home. Depending on where you live, housing can easily exceed $1,000,000, and even if you find something cheaper, consider other elements like closing costs, furnishings, and property taxes. This million isn’t an endless supply of cash - it will run out if you’re not careful.
Instead, if you want to buy a house with the funds, don’t use all of it for the purchase. Figure out your monthly payment on a mortgage and let that help you determine the size of the home you should get. Typically, you’ll need 10 to 20-percent as a down payment, so use a chunk of your $1,000,000 to cover that. This way, you can get the home of your dreams without spending the whole thing.
Step Two: Find the Right Investment
Once you know where most of your money will be going, that doesn’t mean you should withdraw the funds and start writing checks. Ideally, you can invest most of your million dollars and use the earnings to pay for your priorities.
For example, if you put $100,000 into an account that yields 6% interest, you can contribute a maximum amount toward an IRA without diminishing the original balance.
Thankfully, there are tons of investment strategies out there, so it’s merely a matter of finding what works best for your needs. Also, keep in mind that you can diversify your investments to accomplish different goals.
Some of your money should be tied to long-term options that will grow substantially over 10 or 20 years. Another portion of your million should go into short-term investments that’ll pay off in less than five years.
Technically speaking, one of the best places to put your money might be in the stock market, as the average rate of return is around 8-10%. However, the market can be volatile, so there’s no guarantee you’ll get that kind of return.
Another place to invest that you could consider is peer-to-peer lending. Depending on how you do it and which company you invest in, you can expect an ROI of around 6-9% on average.
Companies like Lending Club and Prosper are excellent for new investors, making it easy to get started. Also, they will diversify your contribution so that it has the lowest risk. You can typically determine the level of risk you want, so feel free to experiment a little.
Another option is to lend the money yourself as a personal loan. However, because you’re not a financial institution, the loan won’t be insured or protected by the government. So, even though you can charge interest, you have to be sure that you trust the person receiving the cash.
Real Estate Investing
We mentioned this in the previous step, but there are many opportunities in the real estate world. Also, like peer-to-peer lending, this industry is relatively stable, but of course, there are still risks. Here are some options for real estate investing.
Fix and Flip
Either you or someone else buys a house, fixes it up, and then sells it for a profit. If you’ve never done it before, we don’t suggest you start now, particularly with $1,000,000 in the bank. Instead, find someone who has a lot of experience so you can feel confident in your investment.
Real Estate Investment Trust (REIT)
In this case, you’re pooling your money with others (typically a company) to lower your level of risk. You might not make as much, but your investment is lower on the front end.
If you’ve never been a property manager before, we highly recommend contracting a third-party company. Managing tenants can be a lot of work, and there are plenty of risks involved as well. Another option is to buy a multi-family home, where you live in the house and rent part of the property (i.e., like a duplex).
Overall, if you want to put some of your million dollars into real estate, we suggest doing more research to ensure that it’s worth the time and effort. Yes, you can earn a substantial return, but it can be a lot of work.
Stocks and ETFs
As we mentioned, the stock market can generally give you a good return over the long term. So, putting a substantial chunk of your money into the market could be a smart move. However, here are some elements to consider.
Get Professional Help
Unless you’re a financial wizard already, it’s best to work with a financial planner to ensure you’re making the right choices.
You can also use stock-trading apps like Betterment or Robinhood if you want more control over your trading habits. If you do want to go that route, we suggest researching stock trading first.
Bonds and CDs
Finally, if you want your money to be safe, then putting it into a bond or CD is always a good move. Even if you're going to invest in riskier opportunities like P2P lending, we recommend placing a chunk of your million into bonds or CDs.
Your Money is Locked
CDs are generally more flexible with their duration, with some as short as six months. Bonds can be longer-term, with some maturing at 10 years or more.
Interest Rates Vary
In 2020, interest rates are pretty low on both bonds and CDs. Unfortunately, because the rate is locked in for the length of the contract, you won’t benefit from increases during the life of the bond or CD.
Comparison Shop Beforehand
Every company has their own interest rates, so don’t assume that they’re all the same. Also, many lenders will compete for your business because you’re investing a substantial chunk of cash.
Clint Haynes is a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth. You can learn more about Clint at his website NextGen Wealth.