Don't blow an inheritance — invest it to build wealth for yourself and future generations

  • This week, an Ask a Financial Planner reader wants to know: What should I do with $50,000?
  • In general, the best investment will depend on how you want to eventually spend the money and when. 
  • Index funds are a sensible choice for most people because they offer automatic diversification.
  • Have a question for our Ask a Financial Planner columnist Tanza Loudenback? Fill out this anonymous form. 

Question: Where would you advise me to invest $50,000 that was given to me by my grandparents?

—Anonymous Seattleite, age 42

Answer: Whether an inheritance or gift, that’s a good chunk of cash, so I’d recommend first taking a step back and looking at your overall financial picture. Do you have a solid emergency fund? Are you high-interest debt free? Can you easily cover your regular financial obligations (rent or mortgage payment, food, healthcare, etc.)? 

Investing has always been one of the best tools for building long-term wealth, and it has obviously become more popular as of late. But you don’t want to dive into the stock market, or any other investment for that matter, without ensuring the rest of your financial life is on stable ground. 

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All good? OK great. The next step is reviewing your goals. Investing to “make money” isn’t specific enough. What do you want to use the money for? And when?

Your goals and time horizon — as well as your tolerance for risk — should determine the type of investment you choose, whether individual stocks, a mutual fund, or something else. The full $50,000 certainly doesn’t have to go toward one goal or investment. In fact, splitting it up can be a smart way to balance risk.

What’s the “best” time to invest? If you’re sitting on $50,000, $20,000, or even $1,000, the best time to invest is now. The longer your money is invested, the more time it has to compound. Every day you sit on the sidelines is a day of missing potential returns. 

You have options

Now, if you’ll allow me to reframe your question with specific goals, I can provide some general recommendations.

Option 1: Where would you advise me to invest $50,000 … for retirement?

If you’re planning to retire at the typical age — around 65 for men and 63 for women in the US — you still have about 20 years ahead of you to continue building your nest egg. Ideally you’d be contributing to a tax-deferred retirement plan, such as a 401(k) or 403(b) through your job, to get the most growth out of your savings.

Unfortunately, you can’t just dump $50,000 cash into those workplace accounts because they’re funded with pre-tax salary deferrals. So if funding a comfortable retirement is your top long-term goal, an IRA is a smart supplement. You can contribute up to $6,000 to a traditional or Roth IRA this year and get tax breaks either now or in retirement when you withdraw the money.

If you want to put away more than those accounts allow or invest for a shorter-term goal, a self-directed brokerage account would be the next place to turn to. The trade-off is fewer tax benefits but greater access to your money.

Whether you’re investing in a retirement account or a taxable brokerage account, index funds are a low-cost and reliable choice. You buy a basket of stocks or bonds that track an overall market index, so there’s automatic diversification. Expect average returns, relative stability, and little maintenance.

Option 2: Where would you advise me to invest $50,000 … to pay for my kid’s college education?

College is more expensive than ever, and a 529 plan is the ideal account for shoring up the funds.

Since the plans are state-sponsored, each state runs one or more of their own, and savers are allowed to choose which they prefer. At savingforcollege.com, there are 110 options, and each one has a slightly different investment structure — the site lets you compare investment options, fees, and various tax benefits of each plan. The best option for the average person is typically an age-based portfolio, which will reduce risk as the child approaches college.

The money in a 529 grows completely tax-free and can be withdrawn tax-free at any point, as long as it’s used to cover college tuition, housing, fees, books, and supplies.

A parent, grandparent, godparent, or anyone else can open an account and start contributing after-tax dollars before a child is even born. Once the child is born and has a Social Security number, they can change the beneficiary from themselves to the future student. 

Option 3: Where would you advise me to invest $50,000 … for short-term goals?

A short-term goal is typically anything you plan to fund or purchase within the next five years. If that timeline is flexible and you have a moderate or high risk tolerance, the stock market can offer substantial growth. To minimize risk, go with index funds.

If that timeline is not flexible, stick to a high-yield savings account or certificate of deposit (CD). 

Option 4: Where would you advise me to invest $50,000 … if I want to get into real estate?

Real estate can be a lucrative investment, offering both income in the form of rents and appreciation when you sell property at a profit. It’s also a good way to diversify your portfolio.

Direct investments, like buying a rental home or a property to fix up and flip, usually take considerable time, know-how, and cash, but the payoff can be substantial.

Real-estate crowdfunding, investing in real estate limited partnerships, and buying into real estate investment trusts don’t involve the same level of hands-on management. They also mitigate the risk of investing in a major project alone or without guidance. 

Before you jump into real estate, make sure you do your research.

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Tanza Loudenback, CFP®, is the personal-finance correspondent at Business Insider. She writes most frequently about saving money, planning for retirement, taxes, debt management, and strategies for building wealth. Have a money question for Tanza? Fill out this anonymous form.

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