What is The Best Thing to do With a Lump Sum of Money?

Have you recently discovered that you have a large lump sum of money on your hands.

Regardless of whether this sum is the result of you cutting back on spending during the pandemic, or as a result of coming into a recent cash windfall, you may now be wondering what’s the best thing to do with a lump sum of money?

First of all, the best answer is to always pay-off any outstanding debts that you may have. Once this is done, or is not the case for you, and assuming you want to see your wealth grow and aren’t planning on splashing out on a nice long vacation or new car then read on below for some great investment tips.

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5 great things to do with a lump sum of money

1. Save it in a high-yield savings account.
2. Invest it toward your retirement with an Individual Retirement Account (IRA).
3. Invest it through a Managed Portfolio Service (MRA).
4. Purchase cryptocurrencies, such as ethereum or bitcoin to bolster your portfolio.
5. Purchase real estate investment trusts REITs.

Continue reading to discover more about your choices if you have a lump sum of money to save or invest.

As the past few years, what with the global pandemic and war in Ukraine, have shown us you really should expect the unexpected. After all forewarned is forearmed, and for this reason it may well pay to have a financial reserve on hand for any emergencies. 

To make these savings extra effective, you should think about opening a high-yield savings account. That way, your money benefits from the high interest rates and at the same time you have easy access to these funds should you need them.

1. High yield savings accounts

A high-yield savings account is a savings account that typically pays about interest at about 25 times the national average of a standard savings account. High-yield savings accounts are a relatively new product, which came about as a result of the rise of internet banking and increased competition among banks for clients. 

Given the high interest rates the returns you could make, especially when compared to a normal savings account, are considerable. If you were to open a high-yield savings account with SoFi, then you would be entitled to an annual rate of 2%, which is massive when compared to the rate of 0.01% offered by some traditional savings account. 

If you were to deposit the sum of, say $20,000 with a SoFi high-yield savings account, then by the end of your first year you would have $20,400. Assuming you were to leave this money for at least five years, then you would see your money grow to $22,080. A quite significant return on your initial deposit.

A high-yield savings account may offer considerably generous interest rates, unlike a traditional savings account, but just like a savings account you’re provided against bank failures from the Federal Deposit Insurance Corporation (FDIC) and credit union failures from the National Credit Union Association (NCUA).

So regardless of whether you decide to open an account with SoFi, or one of the many other providers available, do check that they are an FDIC or NCUA member. And as part of any proper due diligence do check the fees and requirements that your provider has. 

Lastly you should bear in mind that no matter the provider you will be subject to federal regulation limiting withdrawals from a savings account to six per monthly cycle will be in effect on any kind of bank savings account.

2. Plan for a financially secure retirement

If you’re a long way from retirement, you may not have given your pension pot much thought. Even so, if you’ve just come into a lump sum of money, there may be no better place to invest it than in an individual retirement account (IRA).

An IRA is a way to save for your retirement that comes with tax-perks to help sweeten the deal. There are many financial providers of IRAs in the US, who in essence hold the money in trust until your retirement. This a great way of investing for your future, especially if you are not interested or inclined to directly micro-manage your investments.

There are three main types of IRA account;

1. Traditional IRA – Contributions made can be deducted on your tax return, and any earnings are tax-deferred until you withdraw them in retirement. Many people who retire are in a lower tax bracket than they were in pre-retirement, so the tax-deferral means the money may be taxed at a lower rate.
2. Roth IRA – And contributions are taxed but the flip side of this is that any earnings and withdrawals you make will be tax free. Provided that certain conditions are met.
3. Rollover IRA – You contribute money “rolled over” from a qualified retirement plan into this traditional IRA. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k) or 403(b), into an IRA.

There are a great range of IRA providers to choose from, but my top picks are the usual suspects; Charles Schwab, Bank of America Merrill Edge and Fidelity. No matter the provider you chose make sure to do your due diligence and pay attention to any fees that you may be charged by the provider. 

Also bear in mind that due to the tax incentivized nature of these accounts you are limited to how much money you can invest this way, at just $6,000 per annum. But that is a small caveat for such a lucrative way of investing.

3. Invest it through a Managed Portfolio Service (MRA).

Most of the accounts we have discussed so far have had limits or allowances that restrict the amount of money you can deposit. Meanwhile, a managed portfolio service (MRA) has no such limitations.

In days gone by, when the world of investing was cordoned off and only available to high-net individuals MRAs used to be known as a wrap account. This was because these accounts offered clients a multitude of services “wrapped” in a single fee. As the industry gradually evolved and became democratized the wrap industry in turn came into contact with a wider market and eventually the term MRA replaced the slightly archaic “wrap account”.

MPAs enable you to invest your money and are an extremely popular choice for investors of all backgrounds. MPA providers will often employ their A-team for management of these accounts and they are suited for clients of almost all backgrounds and investment level.

Providers, such as Vanguard or Charles Schwab, will manage the investment of customers in exchange for a fee. In exchange for which you are provided with a hands-on investment manager who, based on your risk tolerance, financial goals, and financial situation, will invest these funds in the best way possible. Best of all the pricing structure incentivizes the portfolio manager to do their best, as the percentage fee they charge for this service means they have good reason for wanting the value of your assets to grow. 

The choice of which specific managed fund will depend on you and your own ambitions and preferences. There are a large variety of providers of managed portfolios and within these providers the product offering and specifics vary but regardless of the choice you make an MRA is a tax efficient, flexible, and proven way of investing.

4. Buying cryptocurrencies could diversify your portfolio

Cryptocurrency dates back to 1983 when cryptographer David Chaum first conceived of “e-cash”, however it wasn’t until the Covid pandemic that the concept of electronic cash became global craze and truly took-off. 

Technically crypto is a type of currency, though based entirely online, and as a currency can be used to make purchases. That said I should add that the list of companies that currently accept it in return for goods and services is rather limited. This however is slowly changing, and whilst digital pioneers such as NFT providers are expected to accept crypto payments traditional bricks-and-mortar retailers such as Starbucks and Home Depot are increasingly accepting payment in crypto.

The main reason people buy crypto is to trade with it. A trend that only accelerated in recent years as this previously hidden asset gained a reputation for wealth creation. Like stocks and shares, speculators tend to buy crypto when its price is low and sell when it’s high to turn a profit.

There are many different cryptocurrencies out there, and to list them all would take the better part of a day but two of the most popular and well-known cryptocurrencies are Ethereum and Bitcoin.

You can trade these on marketplaces known as crypto exchanges, such as Coinbase or Gemini. Many of these platforms come with a digital crypto “wallet”, which allows you to store your purchased currencies.

Ready my guide to trading cryptocurrency to find out more about these investments.

Bear in mind that cryptocurrency is highly volatile, and as of August 2022, is not well regulated within the US.

5. Purchase real estate investment trusts REITs.

If you are interested in real estate then a real estate investment trust (REIT) may be a good choice for you. 

Depending on what you plan to do with your lump sum, you should think carefully about whether property investment makes sense for you and your long and short-term financial security. Traditionally real-estate has been one of the best investments for long-term wealth creation. 

With an REIT you have access to greater diversification, which in turn can mean potentially higher total returns, and/or lower overall risk exposure. By investing in a real estate investment trust, you are investing in a company that owns and/or manages income-producing commercial real estate, usually by managing the properties themselves but also possibly by managing the mortgage/s on these properties.

The returns on such investments are usually extremely lucrative, for example the three-year average for REITs between November 2017 and November 2020, was 11. 25%. This is well ahead of both the S&P 500 and the Russell 2000, which clocked in at 9.07% and 6.45%, respectively. As such a REIT is something well worth considering, if you are lucky enough to have a large lump sum you wish to invest with.