If I suddenly came into $1 million, I would take a measured approach to investing the money by focusing on long-term growth and stability. Here is a detailed overview of how I would invest the $1 million windfall:
Pay Off Debt
The first thing I would do is pay off any outstanding debt. This could include credit card bills, student loans, car loans, etc. Eliminating high-interest debt frees up more money to invest each month. Depending on the amount of debt owed, this could potentially free up several hundred dollars or more per month. Paying off debt also provides mental clarity and reduces stress.
Setup Emergency Fund
After eliminating debt, I would establish a solid emergency fund. Financial experts recommend having 3-6 months of living expenses set aside in a savings account for unexpected costs like medical bills, home or car repairs, job loss, etc. For me, setting aside $25,000 would provide a comfortable 5-6 month emergency fund. Knowing this money is set aside for a rainy day provides peace of mind.
Max Out Retirement Accounts
The next step I would take is fully funding my retirement accounts for the year. For 2023, that means contributing $22,500 to a 401(k) and $6,500 to an IRA. Making the maximum contribution takes advantage of the tax benefits these accounts provide. The money invested can grow tax-deferred and compound substantially over decades. Maxing out contributions early in the year allows more time for investment growth.
Invest in Index Funds
Once retirement accounts are funded, I would invest the remainder in broad market index funds. Index funds provide instant diversification and simplify investing by matching the performance of major indexes like the S&P 500. I would allocate 60% to U.S. stock index funds, 30% to international stock index funds, and 10% to U.S. bond index funds. This provides a balanced asset mix aligned to my long-term goals and risk tolerance. Index funds also have very low expense ratios, minimizing fees.
Examples could include:
- Vanguard S&P 500 ETF (VOO)
- Vanguard Total International Stock ETF (VXUS)
- Vanguard Total Bond Market ETF (BND)
I would invest lump sums into these funds up to the maximum annual contribution limits, then make regular monthly investments. Dollar-cost averaging over time helps reduce risk.
Purchase Real Estate Investment Property
Once retirement and index fund contributions are maxed out, I would consider purchasing an investment property. Real estate can provide passive income along with appreciation over time. I would look for a duplex or triplex under $500,000 in a market with strong rental demand and low vacancies. Living in one unit while renting the others can cover most or all of the mortgage payment. Any remaining cash flow provides diversification and a hedge against inflation.
Invest in Individual Stocks
If there is any windfall left after the above steps, I may use a small portion (10% or less) to invest in individual stocks. I would focus on established, blue chip companies with wide competitive advantages, loyal customers, histories of dividend growth, and potential for growth. Low fee/commission trading platforms make purchasing stocks affordable. Potential companies could include Apple, Microsoft, Google, Disney, McDonalds, Home Depot, Johnson & Johnson, Procter & Gamble, etc. I would hold a diversified basket of 10-15 stocks for the long haul.
Next Steps If More 1 Million+ Money Comes In
If I am fortunate enough to have additional windfalls down the road, I would first revisit the above steps and maximize contributions wherever possible. Some other options could include:
- Venture investments like real estate syndications, private equity, venture capital funds, etc. for diversification into alternative assets. Start very small to test these out.
- Charitable trusts could provide tax benefits while supporting causes I care about.
- Improving my primary residence by remodeling or moving up to my dream home.
- Annuities could provide guaranteed lifetime fixed income.
- Booking dream vacations like international trips or cruises.
- Hiring a financial advisor to provide guidance.
The key is being thoughtful about how I invest and not drastically changing my lifestyle or taking excessive risks. Patience and discipline are important. Moving slow to build a solid foundation sets me up for long-term success. With the right financial habits, I could turn $1 million into a life-changing amount of money.