I just received $40K lump sum (before taxes). How best to invest? HELP!!?

Question

I'm in my mid thirties. Embarrassingly, I have no savings, and I currently have $45K in credit card, line of credit, and other debts (plus my condo mortgage). Even more embarrassing, I actually make a fairly decent salary. Obviously I need to get help to learn how to budget. I'd like to start things off on the right foot and invest this lump sum wisely.

Should I pay down some of my debts? Or should I stick this in an RRSP to avoid paying taxes? Or should I use it as a down payment on a small condo in my building and rent it out to pay the mortgage?

Probably the best bet is to sit down with a financial consultant. But if anyone has ideas in the meantime, I'd really appreciate it.

Thanks so much!!

Answer 1

first off i suggest the book financial Peace by David Ramsey. I'l warn that he is slightly religious, but the book has good solid advice. It's an easy read and will help you formulate a strategy for paying off yoiur debts. One method is by paying off your smallest debt first, then you take the money that yoiu would have put towards that old payment towards the next larger payment until that one is paid off. Keep on until all debts are paid off.

credit counseling might be a good way to go for your cards. They will require you to stop using your cards, but will work out a payment plan and thwart the interest rate. In some cases it gets knocked down to 0 percent interest.

Suze Orman also has good advice. Her idea would probably be to mostly pay off your debt since the interest rates on (what I suppose) is credit cards is going to kill anything you'd make in interest.

As far as investing the 40K, the online bank ING has what i believe is now 4.25% interest on just a regular savings account. Some other banks are offering as high as 5% on CDs and you can "ladder" a couple of CD's so not all of the $ in tied up for a long period of time.

Just try to look at this a your salvation and a sign to get your finances in order. it can be intimidating and embarrassing, but you can do it.

By the way, stock are WAY too risky to use as an investment tool unless you can afford to lose the money and most financial advisors only want to line their own pockets with your $.

While you are at it get a copy of your credit report and clean it up!

Answer 2

I went through a similar situation.

First of all - figure out the monthly payments and interest costs of your debts (45 Thousand). Think about what you could do if you had that extra money.

Do what I did. Take that 40,000 and pay off your debt and close those accounts. The interest you pay out numbers the interest you would make on an investment. You will be left with about $5,000 in debt.

With the extra money you have every month from eliminating debt payments, split it three ways.

1) Retirement savings (RRSP)
2) Emergency/savings account
3) Debt re-payment.


EXAMPLE

Say you have freed up $1000 per month.

1) $150 savings/emergency fund
2) $300 RRSP
3) $550 to debt (on top of the regular payment)

Once the $5000 debt it paid off, then take the money you were paying on that and start paying down your current mortgage and increase your RRSP amount. Before you know it you will be financially stable, stress-free and happy!

YEAR ONE
You will have $1800 in savings, $3600 in RRSP and will have paid off that debt!

Year 2

1) $200 per month savings
2) $400 RRSP
3) $400 extra on your mortgage.

Now take your Tax rebate each year and dump it into your RRSP or make a lump sum payment on your mortgage. HECK-if you follow the plan, perhaps a vacation is in order.

Answer 3

-Calculate the taxes you will owe on the $40,000 and put that amount in savings (CD, money market) until taxes are due.
-Take the remaining and pay as much of that credit card debt as you can.
-And since you say you make a fairly decent salary, open a Roth IRA and contribute the maximum for 2006 ($4,000). ~consult financial adviser for what to invest in > a diversified mutual fund in the "Growth" category

You should probably be investing and paying off the mortgage at the same time. So don't go and pay off any mortgage until a financial adviser examines your situation more closely.

PAY OFF THE CREDIT CARD DEBT, and then cut up the cards and use only debit cards.

Since you got a lot of things going on, ask around for recommendations on a financial adviser. If people like who they use, they will give you a few good choices.
.

Answer 4

by far the best decision is to pay off credit card debt. you are paying a very high rate on this debt. you will not find investments that will make as much as this debt.

example

you have a $1000 debt and are losing 16 % due to interest on that credit card

you invest in some stocks and mutual funds with 1000 dollars and make a solid 10%

you are actually still losing 6 %

- becoming a landlord is a lot of work- you can be bothered at any time with emergencies and may have to deal with collections if someone does not pay.

- you may want to first consolidate your credit card debt with a company to reduce interest and your total payment- then pay it off with your investment

Answer 5

First thing you should do is sit down with someone who can look at all your debts, income, investments, and all. Nobody should be giving you advice without seeing the whole picture, and this service should be complimentary.

With that being said, where did this money come from? If it is from an investment, there will be tax consequences if you don't put it back in another investment.

As far as the debt goes, again, when you sit down with a financial planner, they should be able to show you how to get out of debt, and not necessarily with a loan. Of course, if that is all on one credit card, ouch to the fees you shall pay.

If you would like more information, contact me through my web page, www.primerica.com\cwright If you are not local, I will make sure to find someone who can help you, and again, with no charge to you.

Answer 6

Put aside some for the taxes, pay down expensive credit card debt, invest some in solid, quality stocks through discount broker, set up a rainy day savings account.

Answer 7

Put $4000.00 into a Traditional IRA, for a $4000 tax deduction, because that $40,000 lump sum will kill you in taxes. If you are married filing joint, put $4000 for your wife also.

Pay off your highest interest rate credit card first.

If you have any children, put $2000 each into a Coverdell Education Savings Account.

Answer 8

i think u shld pay ur debts first cos till u do, u'd never really be free or feel free.
then u shld draw up ur scale of preference, i.e wot do u really need to do now, URGENTLY.
sstart from the highest. Then u have to save away some. u know like farmers, when they harvest crops, they eat some, invest some and save some. So to sustain the income u have to do all of them. try not to blow it all up though...
all the best ok?

Answer 9

paying your debt will actually earn you the most money due to the cost of interest itself. if you put that money in savings, IRA, or stock/ mutual funds none of that is going to earn you money that will grow at a faster rate than what your debt is growing at. .......or you can blow it in vegas you only live once =)

Answer 10

Give me a call and I show you how to invest it.


Just kidding you need to get a financial consultant
Good luck.