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Investing an inheritance

Chris Farrell May 11, 2010

Question: I just inherited a substantial amount of money from my Grandfather (about equal to my yearly salary). My only debts are in my recently purchased condo. No student loans, no credit card debit.

My question is what is the best thing to do with this substantial sum of money? I am interested in the idea of investing the money, leaving the principal and spending the interest. Hoping to get some feedback. Bryan, Saint Anthony, MN

Answer: How would I recommend you invest your windfall?

I’d simply park it in a safe, government guaranteed place for money, such as federally insured bank or credit union accounts and U.S. Treasury bills. Of course you won’t make much interest on the money, at best a fraction of a percent at the moment. But so what? The principal value of the money is safe.

I would then take a year, 2 years, even 3 years to figure out what you would like to do with the money. You could spend the interest if you want or reinvest it so that the value of the money stays even with inflation.

There’s no rush. For instance, you might decide to keep it safe and secure. The reason is that many people would love to have a year’s salary set aside. A cash cushion like that gives you enormous freedom to shift jobs or career, to try something different, to pursue a dream on hold for the past couple of years. You might want to get more aggressive with the money, too, investing it for long-term growth in a well-diversified portfolio. You could decide compromise is the course of wisdom, spending a third on travel and other adventures, keeping a third in emergency savings, and investing a third. You could love your condo and figure the best use of the money is eliminating a monthly mortgage payment.

None of these suggestions is wrong and none of them is right. It all depends on what you want to do, what reflects best your values and goals. That’s why I recommend staying conservative for as long as it takes while you think through your options.

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