Expert: Gina Boykin - 5/14/2008

Question
I recently received a decent sum of money, $25,000. I am 24 years old, and this is the most amount of capital i have ever had in my life. I am trying to determine what my best course of action should be. I thought perhaps a down payment on a home/condo would be a good idea, considering the current interest rates. I have some experience with the stock market (less than $5,000) which has not done particularly well since the subprime issues. I want to avoid  investing in individual stocks. What do you think about the down payment idea on a home/rental property < $200,000. Or do you recommend mutual funds? At an impasse as to what to do.

Answer
Actually, one of the best things you can do, when you come into a large amount of money suddenly, is to wait.  I know that it's hard, but you may make bad decisions if you rush everything.  Think of the goals you already had before you had this money.  Did you plan to purchase a home, or were you saving up for a business idea, or were you already planning on being a landlord?  What short and long term goals do you have?  

If one of your goals was to buy a home, it makes sense to use that money (some of it) toward that goal.  That's easy to calculate.  Take the expected sales price of the home you plan to buy (you can do a rough estimate, or just use the max based on what you will qualify for), and you can calculate 10 percent down payment, and any other expenses (like moving, furniture, etc).  If you were planning to buy a home, though, in 5 years, you may not need to set aside as much.  Then you can just add to it over the months from your paycheck.

Do you already have an emergency fund? If you do not have one, you definitely need one. It should be at least 3 months of your living expenses, and should be in a basic savings account (look up the best rates on www.bankrate.com).

If you plan to retire at some point (I'm guessing you do), then think about putting $5K (the max) into a Roth IRA, which can be in mutual funds, index funds, or exchange-traded funds (ETFs).  You have until April 15th of 2009 to put the money in for 2008, so again, there is no rush to do it in the next few days or even weeks. I would not recommend individual stocks, unless you plan to spend a lot of time researching companies - which is what fund managers get paid to do.

I think if you sit down and write down your goals, the amount you think you will need to achieve your goals, and the timeframe the money will be needed, then you can use the money you make from your current job, and this widfall, toward these goals.

As they say, "proper planning prevents poor performance"!