Unfortunately, I don’t have this particular “problem” at the moment. But if I had, CNN Money can provide some suggestions (43 of them) for dealing with the unexpected income.
1. Best return with no risk: Pay off your highest-interest credit card debt
2. Best 12-month return (risky): Vanguard Growth Index fund
3. Best 12-month return (riskier): 200 shares, Tech Select Sector SPDR
4. Best 12-month return (riskiest): 2,500 shares, Cygne Designs
5. Best long-term returns: T. Rowe Retirement 2045
6. Best long-term returns: T. Rowe Price funds split
7. Best long-term returns: Vanguard fund mix
Number one is not an option for me, as I only use credit cards for regular spending that can be covered when the bill is due. Thus, I never pay an interest. I’m surprised that paying off other debt isn’t mentioned anywhere in story. I still have more than $15,000 in student loan debt (from both my undergraduate studies and my master’s degree for which I didn’t always apply my reimbursements to tuition), and I think that would be one of my first choices for an unexpected $5,000.
However, if I’m not buying a house in the next few months, I will be sometime within the next few years, and I’d like to have significant cash ready for the down payment. A certificate of deposit right now could provide guaranteed returns which after tax about match the interest I pay on the student loans.
CNN Money, in their seventh answer, suggests investing the $5,000 with $1,000 in the Vanguard emerging markets ETF, $1,000 in the small-cap ETF, and and $3,000 in the total international stock index. I don’t think that’s a wise allocation. International stocks have had their run and the dollar is at or near all-time lows compared to other currencies. That makes foreign investments more expensive.
I think putting $5,000 in the market right now, with the indexes at or near record highs, is a little riskier than the article leads the readers to believe. That’s why I’ve changed my future 401(k) contributions to be a little more conservative for the time being. I’ll switch my contributions back to “normal” when prices look more like a discount. Even with the changes in my 401(k), I’m still investing in the market in other accounts, so I’m hedging my bets a little.
I’ll look at some more of CNN Money’s suggestions later, perhaps throughout the week as time permits.
Published or updated May 21, 2007.