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I regularly read your investment advice columns, and I have started to implement lots of things you have suggested in your columns which have made me completely debt-free.
Just need some financial advice — I have about $240,000 in my checking account apart from my other savings. What’s the best way to invest this $240,000? I am not interested in buying a home.
Asking for your account number would be a weird way to start this column, wouldn’t it? Congrats on increasing your net worth by eliminating your debts. Also, congrats on accumulating $240,000 to also help you increase your net worth. I sense a trend with you, M. You’ve been doing quite a bit of heavy lifting to get your net worth to increase. You’re wise to consider putting some of your money to work too.
I don’t know whether this will terrify you or give you some sort of strange confidence, but I’m going to give you the same advice I would give someone who had $240 to invest.
The absolute first place to start is to define the end purpose of your $240,000. The temptation might be to comeback with “the future”, but that answer doesn’t fly with me. That’s akin to answering a vacation destination inquiry with “outside of my house.” Determining the eventual use for money can also help you determine when, why, how, and with whom. Is the money for someone’s education? Early retirement? To start fax machine resale business?
Give your money a job
You’re not alone if you haven’t defined likely purposes for your excess money. Anecdotally, most people don’t assign their money a job. This skipped step is often, well, skipped, under the guise of flexibility. “I don’t know what the money is for, it’s just for whatever pops-up later,” you might think to yourself. That’s a fine sentiment, but you can’t allow yourself to stop there. Your investments aren’t some sort of giant Visa gift card you carry with you to the mall in the case that a kiosk hawker catches your attention. You must have a specific purpose for your money.
As much I’d like to summon a high degree of faux anger and direct it at a person that has a quarter of a million dollars sitting in a bank account, if you haven’t determined what the money is to be used for, then I’m okay with the use of the virtual mattress. If the plan is to use the money in two years, then your investment choice is different than if you wanted to use the money in 30 years. Additionally, if you’re currently 35 years old, I’d give you different advice than I would a person who is 65 years old.
So far, you’ve walked into a diner and shouted “I’m hungry.” For what? Eggs? Chicken? Meatloaf? Falafel? Everyone involved needs more information. Once you’ve determined possible purposes for your $240,000 sometime in the future, you need to evaluate some of your other circumstances — such as your ability to replicate mass income accumulation, your tolerance for principal fluctuation, and your need for particular rates of return.
Market risk vs. inflation risk
Which brings me to one additional idea I’d like to introduce, and within the financial world, it’s a bit of a controversial idea at that. Maybe you don’t need to invest your $240,000. Maybe it’s just fine as is. You could possibly be earning the exact rate of return you need to earn in order to accomplish your financial goals. I’m a firm believer in not taking more risk than necessary, and maybe, just maybe, you’re accomplishing your goals by sitting on top of your money like an expectant hen.
The problem is that it’s unlikely your $240,000 is keeping pace with inflation, which generally is a pretty good sign you’re doing things incorrectly. While you’re currently dodging market risk like the world’s greatest Frogger player, you are exposed to inflation risk. In other words, your money is on a road to losing buying power. Bread and clothes and cars and cheese will increase in price, and you’ll be able to purchase less of all of things because the rate of return you’re earning on your money is less than the rate in which these products are increasing in price. This might be the very reason you emailed me.
Get professional advice
Your next step should be to ask your trusted friends and family members whether or not they have a financial adviser they’d be willing to recommend. Set an appointment with at least three of these advisers, and let them know of your desire to invest $240,000. If they don’t ask you when you’ll need the money, your tolerance for risk, how you accumulated the money, your previous experience investing, your tax concerns, your age, your ability to accumulate more money, and about 10 other vital questions, cross them off the list. When you don’t have plans for your investment money and a potential adviser doesn’t help you to determine a plan for your money prior to pitching specific investments, you’re just asking to get fleeced.
I know how badly you wanted me to give you the name of a company, an investment, or a type of financial product, but there are nearly as many ifs as you have dollars. Now, for that account number.
Peter Dunn is an author, speaker and radio host, and he has a free podcast: Million Dollar Plan. Have a question about money for Pete the Planner? Email him at AskPete@petetheplanner.com