Maybe you just sold your house (cheers!), and you aren’t planning to buy another one right away — or you don’t need all the money from the sale to buy your next place. Or maybe you got a sweet sign-on bonus at a new job. Or maybe you just came into an inheritance or a life insurance settlement. Or maybe you won a really big scratch-off lottery ticket that came in a birthday card (not something to plan around, but we kind of love this one).
No matter how you got it, you have a big chunk of cash waiting to be put … somewhere. Now it’s time to choose what to do with it. That can feel like a big decision, but it doesn’t have to be a hard decision — there are smart steps you can take next, no matter where you are today.
What to do with that money before you start investing
Don’t feel like you have to rush
Especially if this money came to you for a really emotional reason, like the death of a loved one, you might feel a lot of pressure to do the “right” thing with it. You might also have a lot of opinionated people giving you a lot of opinionated opinions about what that looks like.
But if you’re feeling overwhelmed, that’s a) understandable, and b) OK. Ignore those people and stick the money in a savings account for a few weeks (or months) until you decide what to do next. It might also be worth talking through your options with a professional who can help you figure out how this money can best help you hit your long-term goals.
It’s OK to spend a little
It’s your money; if you want to use some of it to replace your coffee table, or upgrade some pieces of your work wardrobe, or finally pay the security deposit on a new apartment, or go on vacation (hellooooo margs on the beach), then do it. Seriously. We’re here for it.
Pay off high-interest debt
Focus on paying off each debt (your credit card balances, student loans, etc) in order from highest interest rate to lowest — that is, follow the debt avalanche method. Also, we typically recommend paying off only those debts with an interest rate greater than 5%. That’s because historically, people have been better off just paying the minimum payments on any debts under 5% and investing instead. (Here’s more on that thinking.)
Build up your emergency fund
Once your high-interest debt’s paid off, aim for three to six months’ worth of take-home pay in your emergency fund, and save it in a place that has zero investing risk — like its own FDIC-insured bank account — because when you need it, it’s gotta be there. (Here’s more emergency fund advice if you’ve got Qs.)
Save for short-term goals
For money you’re planning to use soon — like for a vacation, or a major purchase, or a planned career break — it’s probably not worth exposing your money to the potential volatility of the stock market. If you’re going to need it within one or two years, we recommend keeping it in a bank account instead.
How to invest a big sum of money toward your goals
Historically, investing has been more powerful than just saving up your money in a savings account. That’s why we recommend investing for your big, long-term goals, like retirement, putting a down payment on a house in a few years, or growing your wealth over time.
OK, cool. But how should you invest a big chunk of money? That’s a great question.
Investing all at once vs a little bit at a time
You have two options: You could take the whole pile and invest it right away. Or you could deposit the money into a savings account and then invest a little at a time, bit by bit. The first method is called lump-sum investing (pretty straightforward). The second method is called dollar-cost averaging.
Pros and cons of lump-sum investing
There’s no denying it: You could lose a lot of your investment portfolio’s value if you happened to put all that money into the market right before a downturn. That’s the biggest risk of lump-sum investing, and it would be unfortunate, for sure. But the reverse could also happen — you could invest all your money right before a big market upswing. There’s no way to predict what will come next.
Historically and over the long term, investment markets have trended upward. So the argument for lump-sum investing is to get your money in ASAP so that it can (hopefully) start taking advantage of that trend sooner rather than later. Even if you were to invest the day before a downturn, as long as you left your money invested, your portfolio would have the chance to recover as the market recovered.
Pros and cons of dollar-cost averaging
Dollar-cost averaging basically means investing consistent amounts of money at consistent intervals of time. The idea with dollar-cost averaging is that you’d end up investing on some good days and some bad days, in some good markets and some bad markets — but that over time and the long term, it would all average out to mirror the overall performance of the market. Dollar-cost averaging is meant to help avoid the risks of lump-sum investing, but you could also miss out on any gains the markets might make during that time.
So which one should you choose?
Nobody can predict the future, so what’s an investor with a chunk of investable cash to do? Studies say … use lump-sum investing. The cost of waiting to invest has, historically, just been too high.
If you’re particularly nervous about investing all at once, though, dollar-cost averaging is still a solid choice. (In fact, we really like the way dollar-cost averaging builds good investing habits, and keeps people from making emotion-driven decisions to hang on to their money and try to “time the market” later.) The important part is that you invest.
Investing in a diversified portfolio designed for your goals
Once you’ve decided when to invest, then comes what to invest in. You’re going to want to invest your money in a way that’s most likely to help you hit your financial goals. This is where Ellevest can really help.
When you join Ellevest, you'll have access to different investing goals depending on your membership plan. Once you've decided which goal (or goals) you want to use — like building wealth, or retiring someday, or starting a business, or putting a down payment on a house —we recommend a plan to help you get there.That includes a diversified investment portfolio with a mix of stocks and bonds built to match your goal’s timeline. It also includes how much money you might deposit initially, and then how much you might add to your goals each month in the future. If you have multiple goals, you can use the platform to prioritize them and figure out your next steps. No sweat.
Ellevest's Build Wealth goal is available for all Ellevest members. Access to the Retirement On My Terms goal requires a Plus or Executive membership, and all other goals require an Executive membership.
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The availability of Ellevest's investing goals depends on the membership plan selected. Ellevest Essential members can access Build Wealth only. Ellevest Plus members can access Build Wealth and Retirement On Your Terms. Ellevest Executive members can access all available investing goals.