You get a retention bonus. You sell a house. You receive an inheritance. You receive life insurance proceeds. You sell a business. All of the above are new sources of money in your pocket. So, what do you do with the extra cash?
Don’t just jump to a conclusion, like, “It’s time to get that new car,” or “Let’s pay some bills,” or “It’s time for that new roof.” First, define and evaluate your objectives for all your household income. The objectives determine your priorities, savings strategies, and the saving/investing vehicle.
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You may notice that your emergency savings objective is running low. This objective requires a safe, stable, and liquid strategy. Your vehicles are checking, savings, CDs, money markets.
Maybe you have 2-year-old Joey’s college to consider. The strategy may be growth in the early years flexing toward preservation of value as Joey nears college. This would require a higher stock portfolio in the early years and less in the later.
The point is, use this opportunity to pull back and look at the big picture before focusing like a laser on the topic du jour.
Determining the Vehicle: Saving vs. Investing
Savings are about stability and liquidity, not growth. You may think there is growth because you earn an interest rate, but interest rates will not offset the impacts of taxes and inflation over time; you lose money – purchasing power – over the long haul. Savings are great for short periods, but not for long ones.
Investments are about growth. Investments buy into markets: Stocks, housing, commodities, currencies, etc. Markets are naturally volatile in short periods. However, over long periods, markets tend to provide growth rates that offset taxes and inflation. Investing for short periods is gambling: That’s not a market problem, it’s a strategy problem. So investments are bad for short periods, good for long ones.