How to invest a $10,000 cash windfall

(MONEY Magazine) -- I'm a single mom who works in real estate and has a very unpredictable income. I came into $10,000 recently, but I'm not sure how to invest it. I have about $20,000 in a checking account that I use to pay expenses. But I don't want to put the $10,000 there because it won't earn anything.

There is the possibility I will have to replace some major items in my house within the next year, so I might need access to the money. What is the smartest thing to do with my $10,000? -- B. Crane

I understand that you'd like to earn more on your ten grand than the measly rate you're probably getting in your checking account. But I think you need to resist the urge to push it.

Instead, I think you need to take a conservative approach with this money for two reasons: time horizon and human capital.

Let's start with your time horizon, or the length of time the money will be invested before you need it.

Essentially, the shorter your time horizon the less investing risk you want to take. After all, the last thing you want is to find yourself sitting on a big loss just as you're ready to pull the money out.

The fact that you might have to dip into your $10,000 within the next year implies a very short investing time horizon, which argues against taking an aggressive stance with this money.

But even if you think it's possible that you might have a longer time horizon, you would still need to be careful about taking on too much risk because of the second reason I mentioned, human capital.

Your human capital is essentially your earning power, or your ability to generate income over the course of your life. And just as financial assets -- savings accounts, stocks, bonds, etc.-- are a form of wealth, so too is your human capital.

But even though your human capital isn't a financial asset per se, it can have some of the characteristics of a stock or a bond. For example, someone who has lots of job security and stable earnings -- say, a teacher with tenure -- has human capital that's somewhat bond-like: steady and reliable.

What to do with $10,000

The human capital of someone with very unpredictable earnings -- i.e., someone like you -- is more like a stock in that it generates income that's more volatile and irregular.

Generally, if your human capital is more like a stock than a bond, then you probably want to emphasize bonds in your financial assets more than you otherwise would. The idea is that you don't want to suffer a big setback in the value of your investments at the same time that you're struggling because your income has dropped precipitously.

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I've touched on only the basics of human capital here, but you can learn more about the concept and how to apply it to your investing strategy by checking out this interview with York University finance professor Moshe Milevsky, author of "Are You a Stock or a Bond?"

The upshot, though, is that given your unpredictable income, you probably should invest less aggressively. The fact that you're a single mom also argues for not going too gung ho, as you don't have another person in the household to pick up the slack if your earnings dry up or your investments implode.

So what does all this mean for investing that ten thousand bucks?

Well, if you really think you might have to dip into it within the next couple of years, then you need to be sure it will be there when you need it. That means sticking to FDIC-insured savings accounts or short-term CDs. Yes, the yields are pathetic. But in this case safety of principal and easy access to your money is more important than return.

You may be able to earn more than you're currently getting by checking out sites like Bankrate.com and Billshrink. You might also check out high-yield reward checking accounts, which in some cases offer yields of 4% or more.

Beware, though, that these loftier yields typically come with a variety of strings and conditions, such as requiring that you do a certain number of debit-card transactions or sign up for direct deposit of your paycheck. Many banks also limit the best deals to residents of a specific state or region.

If, at some point, your situation changes and you feel you can invest all or some of that ten thousand longer term -- say, five years or longer -- then you can consider venturing beyond savings accounts and CDs and investing in a portfolio of stock and bond mutual funds.

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For the names of specific funds you might consider investing in, check out our MONEY 70 list of recommended funds. And you can get guidance on the even more important issue of how to divvy up your money between stock and bond funds by revving up our Fix Your Mix tool (although, remember, because of your stock-like human capital, you may want to emphasize bonds even more than our tool recommends).

But until you're sure you won't have to dip into your ten grand for home improvements or any other big expense within the next year or two, the smartest thing you can do with your windfall is to play it safe.