Unsure How To Manage Your First Million? Here Are A Few Options

It could be from an inheritance. 

It could be from a winning lottery ticket. 

It could be from a personal injury insurance settlement. 

Whatever the source, people who are suddenly recipients of an unexpected million dollars will often find themselves in a whole new financial arena. If handled poorly, it will be an “easy come, easy go” moment in time that can potentially leave them off worse than before. If managed wisely, it can give them a financial safety net and a base upon which a nest egg for the future can be built. 

First Things First

An unexpected million dollars immediately affords one the flexibility to deal with financial difficulty overhangs and the ability to get on a better financial footing to deal with future challenges that may crop up. Some of the essential areas that should take precedence include:

1) Debt Elimination –  Dave Ramsey, Suze Orman, and a number of other financial advisors are all in accord on the need to eliminate debt if one wishes to be able to build wealth. Individual debt and accruing interest is universally acknowledged as the biggest anchor weighing down any prospects of future portfolio growth. Paying off and cutting credit cards should be one of the first checklist items.

2) Emergency Fund – As the victims of Hurricane Helene and the Los Angeles fires can attest, there can be devastating events out of the control of mere mortals that can totally wipe out homes and other assets in days or even hours. Other occurrences, like a sudden illness, a traffic accident, or other unforeseen emergencies can often hit without warning, and leave a family breadwinner unable to work. An emergency fund can be a lifesaver in those instances, to provide for essentials, like food, shelter, and medicine. Whether it be an ideal one-year’s salary or even a few month’s equivalent, the emergency fund is another high-priority checklist item.

3) Taxes – Welcome to the ranks of the highest federal tax bracket (37% if over $627,000). As an official member of the 1%, at least for the year the million is obtained, strategies perhaps never fully explored before, like tax harvesting, maxed out IRA and HSA contributions, delays of work bonuses, the timing of tax deductions, and charitable contributions will all become very important. Until a full breakdown of tax liability can be calculated, setting aside 35% or so is a prudent move to make. 

Growth and Safety

Depending on the balance left after setting aside for the most urgent topics listed above, investments are something that will be next to explore. Depending on one’s personal risk tolerance, growth targets, and future passive income needs, some of the following asset classes should be considered for evaluation:

• Real Estate – As a general rule of thumb, if a home purchase is something desired, one should realistically budget no more than 28% of their gross monthly income for mortgage payments. In the case of a $1 million windfall, keeping the total expenditure, including closing costs, taxes and any repairs, under $280,000 is probably not a bad ceiling level to bear in mind. 
• ETFs – Exchange Traded Funds (ETF) for growth or income are a risk-mitigated diversified way to grow funds or for income (ex. An S&P 500 Index ETF) or for income (a Real Estate or Midstream industry ETFs). They are easier to track than a portfolio of individual stocks or bonds, and are lower cost than mutual funds.
• Stocks and Bonds – For those with the proper knowledge of how to research and trade stocks and bonds, these are riskier but can realize faster gains if buying the right stocks. For bonds, there is a level of safety and coupon interest commensurate with rating from Moodys or S&P. 
• Alternative Investments –  Depending on one’s level of prerequisite knowledge of the corresponding industry, other investments that may be of interest. Some of these asset classes may include: precious metals, collectibles, cryptocurrencies, and fine art. 

The Utility of The High-Yield Savings Account

Returning to the Emergency Fund savings and Tax set-asides, the question bound to arise is: what vehicle should these funds be placed in during the interim? One answer that combines safety, a decent APY% and instant liquidity is the High Yield Savings Account (HYSA). Available from a number of online banks as well as brick-and-mortar institutions, HYSAs offer yields anywhere from 3.3% to as high as 5%, rivaling those of bonds. They operate identically to regular savings accounts, and many of them include checking, alerts, and automatic features just like regular savings and checking accounts. They also boast the following attributes:

1. Liquidity – While many HYSA have no minimum deposit, some HYSA may require a minimum floor deposit to earn an agreed-upon highest yield. Otherwise, any amount above that level is fully liquid and can be withdrawn at the account owner’s discretion.
2. Higher Yields – In general, compared to standard savings accounts, however, the HYSA yields can vary between 10X-20X higher. 
3.  

• Equivalent Safety – HYSA are FDIC insured for up to $250,000. As a US government insurance company, FDIC protections are considered equivalent in safety to US Treasury bonds and notes.
• Compounding Interest – The compounding interest of a High Yield Savings Account works the same as compounding interest in a standard bank account. As a result, the principal balances of HYSAs are not affected by interest rate market conditions, apart from the rate of compounding.
• Institutional Variety – High Yield Savings Accounts are available from a variety of well known institutions, such as Capital One and American Express, as well as lesser known ones that may only be available online. Nevertheless, the field is competitive, and obtaining attractive terms and higher yields can conveniently be comparison shopped online. If getting a HYSA from a preferred institution is a requirement, it is often easily accomplished. Click here for an example of an online offer. 

Obtaining a sudden million dollars can turn one’s life around 180 degrees if handled in a deliberate, intelligent fashion. Consulting a financial professional for advice, even for the sake of comparison, is certainly worth the time, just for the value of another informed opinion.

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