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A co-worker walked into my office this past week and asked what she should do with the $20,000 in cash that had been sitting in a money market account. Of course, I had to ask a few more questions so that I could provide a decent financial opinion. By digging, I found out that she was single, had no debt outside of her home mortgage, and wasn’t saving up for anything in particular. She was maxing out her 401(k), with a 60/40 split between their stocks and bonds. She also had 3-6 months worth of expenses lined up. With that knowledge, I came up with the six options you’ll read about below.
Blow It on Something Fun
Let’s start with the most fun option. She could take an exotic dream vacation or splurge on that dream car that she has always wanted. With $20,000, the possibilities are endless on how she could treat herself. While my co-worker laughed at this option, too many people that blow their inheritance, bonus, or winnings on material objects. As a financial blogger, I wouldn’t actually recommend it. However, it’s definitely a popular option today.
Leave the Money in the Money Market
While I didn’t advise that she do this, it was another viable option. Leaving the money in a money market wouldn’t substantially grow her money. However, if she was worried about losing money, then, a money market would be a safe option. On top of that, if she plans to use the money within the next year or two for a big expense, such as replacing a vehicle, home maintenance, or college tuition for her children, it may make sense to keep this money free from the wild swings of the stock market.
Invest in the Stock Market
Whether you decide to invest solely in bonds, stocks, or a mix in between, choosing passive index funds to supercharge your finances is one of the best things that you can do to build your wealth. Over time, stocks have returned close to 10%. Meanwhile, bonds have returned close to 6%. When mixed together, they have returned close to 8%, with less volatility. There are great funds to choose from within Vanguard, Fidelity, and even Charles Schwab. Personally, I am a fan of the S&P 500, but the right fund for you depends on your risk tolerance.
Invest with Wealthfront
My coworker indicated that she didn’t really understand the stock market and didn’t know if she could really deal with all the ups and downs of it. While she liked the idea of the stock market, specifically the historical rate of return, she thought that she would need a financial advisor to help coach her through the market’s behaviors. I told her that instead of hiring a financial advisor, it might be wise to utilize a robo-advisor such as Wealthfront. As you may know, Robo-Advisors can tailor a financial plan to your specific needs. More importantly, they use algorithms to help reduce the risk associated with investing. While not foolproof, Robo-Advisors are becoming popular for financial planning purposes.
Invest in Real Estate
As a former landlord, rental income is a wonderful thing. It is great having someone else pay off your mortgage while your home hopefully appreciates. $20,000 could be a downpayment on a rental property. Then, you can build wealth through real estate. While not completely hassle-free (midnight calls by your tenants can be miserable), you may receive a big bang for your buck. Remember though, if you’re going to buy a rental property, always remember to keep the 1% rule in mind when buying.
Pay Down Your Mortgage
As someone who is incredibly adverse to debt (it use to keep me up at night), I am a big fan of paying off your mortgage. The amount of financial freedom that it has provided me is incredible. The benefits that I’ve experienced (aside from better sleep at night) extend to less stress at work. As a result, I’ve even received promotions for taking on more interesting projects. Paying off my mortgage was one of the best things that I’ve ever done.
On top of that, because of the doubled standard deduction, the number of people who can write off their mortgage interest on their 2018 tax returns is going to greatly drop. Thus, now may be a good time to revisit the thought of starting to pay off your mortgage now.