What to Do With X Dollars and Y Years to Invest It

This question frequently comes up on the Personal Finance subreddit.

I have $5000, where should I invest it?

However, this question is missing a critical component: time.

Without a time frame, it's impossible to say. Do you have a $5000 credit card bill coming up? Sorry bud, you should pay that off before you invest! Want to buy a house in the next 2-3 years and no debt right now? Then that's a different story!

You should also consider if this is a lump sum (windfall, bonus, inheritance) or a payment that will come with regular interval, such a pay raise. Determine what your goals are and what it's going to take to get to them. If you get a pay raise, how much of the raise are you going to contribute each month to your retirement savings? You'll be surprised at how fast regular contributions add up versus lump sum deposits.

All of the below recommendations assume the following:

1. You have no debt (other than mortgage debt) with over 2% interest
2. You have an emergency fund with 3-12 months of expenses in it
3. We'll assume this is a lump sum, one time investment and not recurring cash flow
4. The checking accounts, savings accounts, and CDs are FDIC insured

If either conditions 1 and 2 are false, go back and start with #1. Pay off that debt ASAP! Your best return is going to be paying off debt and freeing up monthly cash flow. Every day you don't means money out of your pocket. If you don't have a properly funded emergency fund, make sure you build it up! Stuff happens. Be ready for it.

Finally, before we dive in here, make sure you take your time making your investment. Educate yourself on the risks and rewards of each potential path. Read everything you can so you want to make the right choice the first time! There's nothing wrong with taking this slow and analysing your choices extensively. Now let's dive in…

How to Invest $100-$10,000

Any amount of money up to $10,000 is probably not going to be life changing for the average American. It may be a great start to your financial independence, savings, or debt pay down goals, but you probably won't be able to quit your day job. So depending on when you'll expect to need the money is how you should invest it:

• 1 Day-1 Month: Checking Account. You're not going to get much return, but you have instant access when you need it.

• 1 Month-12 Months: Savings Account. These days you won't get much more return than a checking account, but at least you'll get something if you park it in a high-yield, online account.

• 1 Year – 3 Years: A Certificate of Deposit (CD, also known as a Term Deposit in some countries). Now you can get a bit more of a return. Some banks are offering 1-2% on their CDs in May 2013.

• 3 Years-10 Years: Now you can finally start making some money. Look into investing with Lending Club, if you understand the risks you'll be taking and how peer lending actually works. You can also look into investing into a bond index fund, such as Vanguard's BND or other similar fixed income funds. Investments from the US Treasury may also be what you're looking for. You probably won't see as great a return, but you'll definitely minimize your risk of loss. Remember to stay diversified, use proper asset allocation to match your risk/reward profile, and using low-expense ratio mutual funds.

• 10 Years+: Now we get serious and can finally put the wealth creating machine that is the US stock market to use. Over the very long term, the US stock market (as measured by the S&P 500) has returned an inflation-adjusted (also known as “real”) annualized return of 6-7%*. The best way to invest in the money making machine that is the US stock market is to invest in low cost, diversified mutual funds or ETFs, such as those offered by Vanguard. A simple portfolio that will protect your asset but also allow for a tremendous amount of growth would be 50% VTI (Vanguard Total Market Index, represents over 3000 US stocks) and 50% BND (Vanguard Total Bond Fund, represents 3000 US bonds). Explore for yourself what kind of asset allocation and lazy portfolio works for you. For a 10 year-30 year time frame, I prefer the conservative 25% in bonds, 75% in stocks. For 30+ years, I prefer your age-20 as a percent in bonds.

• Age 60+: If you're not going to need the money until the “normal” retirement age of 60+, then the best way to take advantage of all this growth is in tax advantaged accounts. 401ks, Roth IRAs, TSP – these are where you want to start putting your money. Again, use lazy portfolios to maximize your return while minimizing your risk and start making big money in the stock market!

How to Invest $10,001-$50,000

This could be potentially life changing. $50,000 is almost 10% more than the average American wage. With an entire year's salary to invest, you could definitely make a difference in your life and set yourself up to achieving your goals. Follow this checklist to determine where to invest your hard earned money:

1. Any debt at all other than mortgage debt? Pay it off, in full if possible, while leaving a bit left over for your…
2. Emergency fund. Make sure it's fully funded, with between 3-12 months of expense, depending on whether your job is super secure, or you think you'll be changing jobs soon. Whatever amount you feel comfortable with.
3. Consider your goals and invest just like you would above in the $100-10,000 range.

It's funny how up to a certain point (about $1 million), nothing really changes with this plan. Sure, you may want to start talking to CFAs, CPAs, and attorneys above the $250,000 level. You also need to start watching your deposits in FDIC insured accounts to ensure you don't go over the deposit insurance limit ($250,000 per account type, per person, per bank), like people in Cyprus did.

How to Invest $50,000-$250,000

Nothing really changes at this level compared to the previous one. You may want to contact a fee only (not commissioned based or someone who takes a percentage of managed assets) Certified Financial Planner (CFA) that can discuss your goals with you and how you are going to achieve them.

I would be very surprised if they recommended anything different from what is laid out above. You could also consider investing in a rental property at this level. However, make sure you consider all the costs, risks, and time that it will take to be a landlord. This is not a decision that should be taken lightly!

Finally, make sure you also get your affairs in order. Have a will drafted and signed and make sure your estate is set up the way you want it to be. This isn't an amount of money you want going to the wrong person if you were to die.

How to Invest $250,000-$1,000,000

Two things change at this level.

1. Welcome to the big leagues! $250,000 is more than twice the median American net worth. If invested properly, you could be very close to achieving financial independence in the next few years.
2. You need to watch your FDIC insured accounts (checking, saving, and CDs) to make sure you don't have more than $250,000 per account type per bank. If you have more than $250,000 in your checking accounts at one bank, you need to move that money ASAP to another bank! Actually, you need to invest that money ASAP into your lazy portfolio (see above) so you can start having your money make you more money!

Other than that, my advice remains the same. Pay down debt, maybe even consider completely paying off your house at this level. Build that emergency fund and then invest as above based on your time horizon.

How to Investment $1,000,000+

Now it's time to talk to a Certified Financial Planner (CFA), Certified Public Accountant (CPA), and an attorney. You are probably going to owe some serious taxes on this money and you may want to start exploring trust funds, gifts to friends or relatives, or setting up a charitable trust, to make donations on your behalf to causes you believe in.

Other than talking to a few advisors, I still maintain the same advice as above. Invest based on your time horizon. Don't try chasing massively risky investments just because you feel like you need to now that you're a millionaire. Stay focused on the basics:

• No debt
• 3-12 month cash emergency fund
• Own your home or be happy renting
• Invest in FDIC insured accounts, peer lending, and lazy portfolios, based on when you'll need the money

Just because you have $1,000,000+ does not give you access to wealth creation machines beyond what you could access at the $50,000 mark. Sure, you may get a better return on CDs, but there are very few scenarios I can imagine where you would need to invest a million in CDs.

With a million dollars plus, you can start researching financial independence earnestly. Explore the FIRECalc (Financial Independence/Retire Early Calculator) and see how much  it's going to take to retire. You may be surprised. With a conservative 3-4% withdrawal rate, you may be able to declare financial independence today!

Best of luck to you as you explore your investment options, at any level of windfall, from $100 to $1,000,000 and more!

* From 1886-2010, US equities returned 5.9%. No other asset has generated such growth. Not corporate bonds (2.52%), nor Treasury bonds (1.88%), not even gold (.5%) or crude oil (.86%).