Solutions 4 Financial Independence: 10/23/18

Published: Oct. 23, 2018 at 8:18 AM EDT
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Question: Today’s question comes from Sara from Glenville. “My father recently passed away and I received a small inheritance. I do not want to tie this money up because I may be spending it in a few years, but I also want to make more than I am in the bank. What should I do with this money?

Answer (John Halterman, Beacon Wealth Management): Well, the first thing is, you said some very key words, that is that you don't want to tie this money up, that is because you may be spending it in a few years. You know, what I always say about investments is that the very first thing you should be thinking about is what is the purpose of the money, what is your time horizon, and what's the risk tolerance that goes with it? So, a lot of times people get confused. I have people come to me and say "hey, I have this money that is intermediate money, that I may use as a down payment on a house in the future. I'm not happy with my bank interest rates, but I want to invest it." So I say "when do you plan on spending all this money?" They say "probably 2 or 3 years." No way, because what I want people to do is compartmentalize. Put all your money into different buckets. As an example, you might have a rainy day bucket, you might have an intermediate bucket, for opportunities such as buying a house, and then of course you have your long-term essentials, which would be retirement and education. So, each of those are going to have different risk tolerances, each of those are going to have different tax purposes, each of those are going to have different time frames. So, it sounds like here, you've got an intermediate time frame. The second thing you want to think about is accessibility. You don't want to put it in anything tax-deferred, because unfortunately, anytime you get a tax advantage, you may have to pay a penalty to get it out. So, that's what you got to be thinking. So, it may be that a non-qualified account, which means that you pay the taxes each and every single year, but you are able to have full accessibility, and you can invest it in any type of investment you want, might be the best suited thing there.