NEW YORK (CNNfn) - Out of the blue, you get a giant inheritance that changes your life. But after the initial excitement of the sudden financial windfall wears off, you start wondering how to best make use of the cash.|
In response to a reader's question, Mark Groesbeck, a certified financial planner from Houston, and a member of the Financial Planning Association, outlined three steps for assessing and investing this new asset.
Ask the experts a question
What's the best thing to do with a sudden windfall of more than $250,000? I received an inheritance, mostly in stock. I'm 36, and my wife and I think this is a good seed for early retirement. We are fully employed and comfortable with our level of income - so we don't need additional funds from this windfall immediately.
An unexpected windfall usually can cause people to want three things: Know where they are now, have a sense of control and settle into their new routine.
Whenever the unexpected happens, it is a good time to reevaluate your long-term goals. How will this "new" money impact your goals? You may be able to retire earlier than previously thought, or you may be able to acquire a dream vacation condo.
Assess where you are now
If you have non-deductible loans like credit cards or auto loans at high interest rates, you may want to consider paying these off. Usually you would be better paying off a 19 percent interest credit card balance than trying to invest the proceeds.
Next, make sure you have three to six months of living expenses in cash for emergencies. With this financial foundation, you could then look to start investing for the long term.
Gain a sense of control
After you have completed step one you should feel confident about your current finances.
Take time to set new goals that reflect you financial resources. Make sure you are maximizing your retirement plan contributions annually. If you see you have excess monthly cash flow, consider setting up a monthly draft directly into a mutual fund.
Begin a savings plan for future known expenses like special trips, weddings or anniversaries. Setting goals and establishing savings plans will give your control and increase your chances of financial success.
Settle into your new routine and review regularly
At least once a year review your investments, estate plan, insurances, and tax situation to make sure you are on track with your goals. Make sure that all these areas of your finances are working together for your long-term success.
An example of this coordination would be to consider tax deferred investing like Roth IRAs and variable annuities, when you are in a high tax bracket.
Regularly review your risk tolerance to make sure you are not taking more risk than you need to meet your goals. Regularly review your asset allocation to make sure you maintain a good balance. (Click here for CNNfn.com's most recent Portfolio Rx feature, which looks at issues like asset allocation, rebalancing and diversification).
If you are saving for the long run, then having the majority of your investments in the stock market would make the most sense -- assuming you are comfortable with that.