Q: I just made money from the sale of a property but I’m not ready to buy another place just yet. What should I do with the money? I don’t want to spend it, I just want to put it in a safe investment. What do you suggest?
A: Congratulations on your sale and your profit. Current tax law permits you to keep up to $250,000 if you’re single (up to $500,000 if you’re married) in profits from the sale of your home tax free, provided you’ve lived in your home for at least two of the last five years.
If you don’t meet these requirements, you may owe capital gains tax of up to 15 percent of the profits. And if you fall into this category, the first thing I’d do is separate out from your cash the money you will need to pay the IRS next year.
If you are able to keep the cash tax-free, you should spend some time thinking about what you’re going to do with the money, as that will drive your investment.
If you’re going to use this cash over the next couple of years to either purchase a new home or car, pay college tuition for yourself, a spouse or a child, or take a trip, you’ll want to invest the money somewhere very safe, so it’s there when you need it.
If some of the money is for your retirement, and you won’t need to touch it for twenty years or more, most financial planners would consider that to be long-term savings.
For short-term money, I suggest you look for a bank CD (certificate of deposit), or even just leaving it in a money market account. While you won’t get much in the way of interest, the cash will be there when you need it. A good place to check CD rates is at www.BankRate.com.
For longer-term investing, you should probably think about buying stocks. A relatively easy and painless way to do this is to invest in Index funds. These are mutual funds that mirror the index on which they are based, like the Standard & Poor 500, which consists of shares in the biggest 500 American companies.
Vanguard (www.Vanguard.com) is considered the grandfather of index funds, and they offer the least expensive index funds around, but since index funds are generally inexpensive to own, and most financial investment companies offer them, you can shop around.
You didn’t mention how much money you earned from the sale of your home, but if it is a significant sum, you might want to consider paying for a few hours of a financial planner’s time to go over your portfolio and help you make a smart investment decision.
For a list of fee-only financial planners in your area, call toll-free 888-FEE-ONLY, or go online to the National Association of Personal Financial Advisors (www.napfa.org).