You have probably heard people talk about this hypothetical situation before. They begin by saying what they would do if they had a millions of dollars. Some people talk about spending it but the smart ones probably talk about investments.
This scenario is not just some silly fantasy. It allows people to think about the right investment moves when not hampered by lack of means. For example, you might think that it is smart to invest 10% of your portfolio in a certain financial instrument but you are afraid to do it when you just barely have enough to invest.
If you only have $50,000 to play with, it is scary to lose $5,000 because you get that much closer to zero. When you have one million dollars, losing $100,000 seems bad but survivable and possibly worth the risk.
Someday, you may have this much money and you will profit from having planned ahead of time. Also, this can be a good moment to see how you may be avoiding some of your own advice about investment.
After all, if you have $50,000 to invest right now, there may have been a time when you only had $5,000. What did you think back then about having $50,000? Are you living up to those plans or are you letting things complicate the right approach to investment?
People, especially people with money problems, sometimes talk about the dream of living off of exactly one million dollars. A few decades ago, a lot of people would have put it in a high-interest savings account and lived off the interest.
Back then, there were such accounts with some credit unions that generated as much as eight or nine percent interest annually. This plan is no longer feasible. If you sit one million dollars in a bank now, you should hope that you do not live much longer because the interest rate is as close to zero as possible.
If you were to suddenly come into money and acquire one million dollars after taxes, you would have to invest it more carefully in order to create a self-sustaining and steady stream of income. There are several ways to approach this.
A very conservative approach would probably divide the money into portions and invest some of them in certificates of deposit or CDs. These accounts have slightly higher interest rates than regular savings accounts but the funds remain locked into the accounts. They cannot be removed before the maturity date without suffering financial penalties.
A 5-year CD right now might give you as much as 1.75% annually. A $100,000 investment in this type of account would get you over $9,000 at the end of five years because of the compounding interest.
Still, that only works out to a little over $90,000 in five years if you invested the whole thing. You might want to do this with some of the money but invest a little more aggressively with other chunks of it.
Federal bonds can earn a little more than a CD but have similar or longer lengths of time until maturity is reached. A conservative investor would probably invest some of his or her $1 million in these bonds as well. However, even a very conservative investor would want to spread some of the money out into stocks.
Stocks are more dangerous investments because they are not guaranteed to generate returns. In fact, stocks can lose value. However, in any given year, most stocks typically gain value and are better investments than bonds.
That is why it would be a good idea to invest in index funds that contain a wide variety of stocks. Some years such funds may generate as much as 5% or more on their returns. Certain individual stocks will pay dividends to shareholders and act as an additional income source.
What If You Had Millions?
If you received a lot more money, millions and millions of dollars, what should you do with it? Many of the same bits of advice used for the one million dollar sum would still hold true.
In fact, they would be even more effective. Investing the entire sum in CDs would not be wise but it would generate more income per year than you would probably need. Still, a portion of the millions should probably go into such accounts.