How to Invest $10k, $50K, or $1M: 8 Smart Steps for Any Windfall

This comprehensive guide will walk you through 8 crucial steps to manage your newfound wealth wisely.

How to Invest $50K or $1M: 8 Smart Steps for Any Windfall

Hell yeah! You've just received a significant windfall. Whether it's $50,000 or $1 million, the principles of smart investing remain the same. This comprehensive guide will walk you through 8 crucial steps to manage your newfound wealth wisely.

1. Take a Breath and Give Yourself Time

Receiving a large sum of money can trigger a huge mix of emotions. You will feel all of these at some point, often at the same time - Excitement, Gratitude, Worry, Anxiety, and Guilt.

Managing these feelings is half the battle. The other half? Following sound financial practices.

Investing is a marathon, not a sprint. You are only human if you aren’t sure what to do right away. You have time to figure it out. Allow yourself up to 6 months to process the windfall and plan your next steps.

Windfalls often come with life changes that take time to process:

• An inheritance

• An insurance payout

• Selling a business

• Death of a loved one

Each scenario carries its own emotional weight. Resist the urge to rush into investments and do anything drastic. You have your whole life to figure this out. A few months of having the money sit there is nothing compared to making a bad decision because you didn’t think it through.

1. Take a few months to carefully consider your options

2. Think through your financial plan

3. Process any intense emotions

However, you don’t want it to sit there forever. Give yourself a general time limit to avoid analysis paralysis. 6 months is a good general guideline for a significant windfall. At the end of 6 months, if you are still not sure what to do, contact a financial advisor (see below).

2. Plan for Taxes and Secure Your Funds

Do you owe taxes?

You generally would pay taxes for:

1. Lottery Winnings, Gambling Wins, Prizes and Awards

2. Inheritances - but only if over $12.9M or if your state has an inheritance or estate tax (CT, HI, IL, ME, MD, MA, MN, NY, OR, RI, VT, WA, DC)

3. Found Property or Treasure Troves (wouldn’t that be awesome!)

4. Stock or Real Estate Sales

5. Debt Forgiveness

You generally would not pay taxes for:

1. Gifts (if less than $17,000 per recipient in 2023).

2. Inheritances - if you do not live in an estate tax state and it is less than $12.9M

3. Life Insurance Proceeds, in most cases.

4. Qualified Scholarships.

5. Certain Lawsuit Settlements. Personal injury or physical sickness, that amount is typically not taxable. However, punitive damages or compensation for lost wages usually are.

6. Tax-Exempt Municipal Bonds

The key determining factor is whether the windfall is considered taxable income under the law. A big windfall means a big potential tax bill, so it’s generally recommended to contact a tax advisor or accountant to clarify your situation.

When estimating your taxes, we recommend:

1. Estimate your tax bill using this helpful calculator

2. Add 10% for a margin of error.

3. Place the estimated tax amount in a High-Yield Savings Account (HYSA) to earn some interest while waiting for tax season.

3. Reevaluate Your Life Plan

Ask yourself:

• Is this money a game-changer?

• Could it impact your need to work?

Remember: While $1 million is substantial, it's often not enough for most people to retire comfortably. Most estimates suggest a realistic retirement target of $2 million or more.

Reality Check: Unless your windfall exceeds $1 million significantly, it's more likely to help you retire earlier rather than dramatically alter your financial plan. So don’t make any irreversible decisions right away. Definitely don’t quit your job impusively.

4. Set Aside Immediate Cash Needs

The next step is to ask yourself: what short-term cash needs do I have? 

When we say short-term, think in less than 5 years.  Do you want to pay for a wedding, college tuition, or put a down payment on a house.

Estimate the amount you need and put it in a HYSA or other FDIC-insured account for these purposes. Identify short-term cash needs (within 3-5 years).

5. Craft Your Investment Portfolio

The surprising truth: The core principles remain the same whether investing $10K or $1M.

• Invest the majority in low-cost index funds

• Avoid expensive advisors or complicated strategies

• Focus on a simple asset allocation of stocks and bonds.

Why This Works: Research shows that the fees you save by self-managing often outweigh any extra returns from professional management.

If you already have an investment strategy, you should stick to it. You don’t need to change it just because you have more. When I reached $1M in investments the slow way, by investing every month, I didn’t immediately change my investment strategy, so why should you if you get the money all at once? 

Two Solid Options:

1. Target Date Fund

2. Follow the “Warren Buffett Portfolio”. He recommends

   • 90% in low-cost S&P 500 index funds, like Vanguard’s VOO ETF.

   • 10% in short-term treasuries index fund, like Vanguard’s VGSH ETF.

Buffett has made the case that this simple portfolio often outperforms hedge funds and actively managed portfolios due to lower fees and broad diversification.

6. Choose Your Investment Strategy: DCA vs. Lump-Sum

After you’ve set aside your short-term needs and have an investment plan, you’ll need to decide whether to invest this windfall all at once (lump-sum) or slowly over time (Dollar Cost Averaging(

This is a decision that is more about your psychology than anything else. Dollar-cost averaging can be particularly comforting if you're nervous about market volatility, as it allows for gradual investment over time. Although the research shows that a Lump-Sum investment is more likely to generate slightly more investment returns simply because your money is in the market a little longer and can take advantage of that time for potential for growth. 

Dollar-Cost Averaging (DCA)

• Reduces the Impact of Volatility: By spreading out the investment over time, DCA reduces the risk of investing a large amount right before a drop in the market

• Psychological Ease: DCA is less stressful for investors who are risk-averse or anxious about market fluctuations. It avoids the need to time the market.

Lump-Sum investing

• Probability of slightly Higher Long-Term Returns: Lump-sum investing is more likely to yield higher returns in the long run, as it takes full advantage of the market’s tendency to increase over time.

• Simplicity: It’s a straightforward approach. You get the investment done and can move on.

My advice: For smaller amounts, I prefer lump-sum investing. For large windfalls, I'd likely spread investments over a few months for peace of mind.

7. Allocate Your 'Play Money' (But Keep It Small)

If you feel compelled to use part of it for pick individual, BTC, or something else outside of your core index fund portfolio, see it for what it is, play money, and keep it limited to less than ~5-10% of your portfolio.  You are taking on much more risk with individual investments than with a diversified index fund. Keep the bulk of your investments in proven assets that have demonstrated to go up over time on average.

If individual stocks or cryptocurrencies still tempt you:

1. Limit these investments to 5-10% of your portfolio

2. Consider this your "play money"

3. Keep the bulk of your investments in proven, long-term growth assets

8. Seek Professional Advice (If Needed)

If you still want to get professional financial advice after doing your research, that’s not bad.  Especially with larger windfalls if it will make you more comfortable making what feels like a big decision. I recommend always educating yourself first because investing in yourself is completely doable and in your best interest.  Every advisor fee you save means more money to invest and compound in your bank. 

If you decide to consult a professional:

1. Educate yourself first

2. Avoid advisors charging Assets Under Management (AUM) fees or commissions - That seemingly small 1% fee could cost you tens or hundreds of thousands of dollars over your lifetime.

3. Instead, look for fixed-fee or hourly-rate advisors.

4. Remember: Every dollar saved in fees is a dollar that can grow through compound interest

Summary

1. Take time (up to 6 months) to process the windfall emotionally and plan thoughtfully before making investment decisions.

2. Estimate and set aside money for taxes in a High-Yield Savings Account (HYSA), consulting a CPA for complex situations.

3. Reassess your life plan, considering if the windfall significantly impacts your work or retirement timeline.

4. Identify and segregate funds for immediate cash needs (within 3-5 years) in a HYSA or FDIC-insured account.

5. Craft your investment portfolio focusing on low-cost index funds, following either a Target Date Fund approach or Warren Buffett's 90/10 strategy (90% S&P 500 index, 10% short-term treasuries).

6. Choose between Dollar-Cost Averaging (DCA) and lump-sum investing based on your risk tolerance and market outlook.

7. If desired, allocate a small portion (5-10%) of your portfolio as "play money" for higher-risk investments.

8. Consider seeking advice from a fixed-fee or hourly-rate financial advisor if needed, avoiding percentage-based fees to maximize long-term growth.