By Janet Aschkenasy, Contributor
It's a great problem to have, most would agree. Through an inheritance, life insurance proceeds, the sale of a property or other sources of income, suddenly you have $50,000 you want to invest -- and you want to do it wisely.
The first thing to do is make sure you don't have any high-interest credit cards or other high-interest debt to pay down, financial advisors said. "If it's a low-interest car loan, that's OK," said Scot Hanson, a certified financial planner in Shoreview, Minn. Otherwise, if you're figuring out how to invest $50,000, it makes no sense to hang on to a 28 percent interest credit card when other investments will generate returns of 7 percent to 12 percent on average.
"You definitely want to be sure you are in a position to invest," observed Elizabeth Grahsl, a certified financial planner and vice president with Prosperity Bank in Dallas.
Investing in a 401(k)
If you're wondering how to invest $50,000 for the highest possible return, that's in a company 401(k) plan with an employer match, Hanson and Grahsl emphasized.
"Put in as much as you can to obtain the match," said Grahsl. The most common type of 401(k) match is 50 cents per dollar up to a specified percentage of pay, commonly 6 percent.
Most experts recommend saving at least 10 percent of your income to assure a secure retirement. "Retirement planning should be a priority, especially if you are behind or haven't started saving for it yet," said Grahsl.
She suggested putting as much as $18,000 into your 401(k), the maximum the IRS allows for 2015. If that seems like too much of a commitment, be sure you invest enough to achieve the full match from your employer.
Assuming you make $100,000 a year and your employer matches 50 percent of your contribution up to 6 percent of salary, then investing $18,000 per year would give you $2,134,957 after 30 years, through a balanced stock-and-bond fund approach assuming a 7 percent annual return earned, she said.
Read: How to Update Your 401K
Investing in a Roth IRA
Grahsl recommended maxing out your Roth IRA contribution as a strong tip for how to invest for retirement.
"Roth contributions can be accessed tax- and penalty-free for any reason, so there is no excuse to pass up contributing the maximum $5,500 the IRS allows for 2015. ... Choose an index fund that complements your 401(k), such as an international index fund or bond index," she said.
If you invest $5,500 only once and leave the investment to compound at 7% for 30 years, you would end up with $44,640.
If you contribute that same amount every year for 30 years, your investment would grow to $559,157, assuming an average 7% annual return, said Grahsl.
Hanson is also a big fan of the Roth IRA. "It's a cookie jar. Buy the same stock or mutual fund elsewhere, and if doubles or triples in value you need to pay tax on it when you retire or [otherwise] take the proceeds." Since the investment in a Roth IRA is with after-tax dollars, there is no tax to worry about on profits.
Investing in CDs or Savings Accounts
Cash reserves or short-term bonds are most appropriate for a short- or mid-term goal, such as a new car or engagement ring, said Grahsl, "Ally Bank offers 2% on a five-year CD."
Investing $10,000 in Ally's 2% five-year CD would give you $11,050 when the CD matures. Putting the $100,00 in a high-yield savings account paying an average of 1.5% a year would give you $10,460 after three years. Investing $10,000 in a bond market index fund averaging 3 percent would give you $12,334 after seven years, she noted.
Related: How to Find the Best Savings Account
Investing in 529 Plans
For those who want to save for their children's or grandchildren's college education, Grahsl would deposit another $10,000 into a 529 plan. This $10,000 would end up as $29,368 in 18 years, assuming a 6% rate of return.
Alternatively, if you are able to save $250 a month in a 529 plan for 18 years, you will end up with $97,322, assuming the same return of 6% per year, said Grahsl.
Investing in a Real Estate Investment Trust
Do everything Grahsl recommended and you will have $6,500 left to put into something a little more aggressive. She suggests a real estate investment trust. Assuming a 12% yield on the $6,500, a 30-year investment would yield $233,672.slide 6:
Investing in Mutual Funds
In your 401(k) or IRA, you most likely have a choice of mutual funds. You can build your own portfolio, but it doesn't hurt to have your 401(k) or bank advisor help you learn how to invest in mutual funds. "For long-term investing I like mutual funds," hanson said, pointing to "higher-risk/higher reward" classes like large-cap -- "the most common is the S&P 500," he said -- small-cap, global and emerging market funds. All such classes should be held, if possible, for a minimum of 15 years, he added.
"The worst stock picker in the world could have held any of these mutual funds before the crash of 2008 and would still be happy holding them now," Hanson said. To diversify, he recommended adding a commodity-based mutual fund and a REIT.
In "The Complete Money and Investing Guidebook," Dave Kansas recommended a mix of bond, stock, domestic and international funds. Index funds, designed to replicate the performance a particular market, are cheapest. Actively managed funds use portfolio managers and as a result are more costly.
Investing in Stocks
Stock picking is tricky, said Hanson, and the risks in putting significant cash into a single stock call for the guidance of a certified financial planner or money manager.
Here's how to invest in stocks, from Keith Newcomb, founder of Full Life Financial in Nashville and an investment advisor for 19 years. "I consider the overall market environment, how various asset classes (such as bonds, stocks, commodities, and currencies) are doing across various economic regions and in various sectors."
"I buy investments I believe are poised for new or continued strong performance," he said. "To improve performance, I seek to have good timing through buying strong investments on temporary weakness or investments that have been extremely weak or treading water for a very long time but seem to be climbing out of the water and slipping on track shoes to run."
Why Part of Your $50,000 Investment Should Be an Emergency Fund
If you are self-employed or a contractor who regularly experiences ebbs and flows in income, Grahsl suggested socking $5,000 to $10,000 into a higher-interest savings account that provides liquidity in case of emergencies. If your employment feels secure and your paycheck is regular, you should still make sure you have at least $3,000 stashed away in something that's easy to get your hands on.
This article originally appeared on GOBankingRates.com: How to Invest $50,000
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