High Heels and Finance: A Good Problem to Have
Throughout our lives and various circumstances, most of us will receive larger chunks of cash than the usual deposit from our pay checks. Before you stop reading, think about it. I’m not talking about receiving a huge inheritance from a long lost relative – although that circumstance would count. Most commonly, we receive annual bonuses at work and/or tax refunds.
For many of us, these funds are used to pay off debt or build our emergency fund, but what should we do if we want to invest the money? If our new “wealth” is sitting in a savings account, we may feel as though we are missing an opportunity to put that money to work. However, we may be a bit leery, if not completely terrified, of investing a lump of cash all at once. First, we shouldn’t rush. It’s perfectly fine to be afraid. Take a deep breath.
If we don’t already have one, we should consider opening and moving the funds into our bank’s highest-yielding savings or money market account. A brief discussion with a bank representative should solve the problem. This way, our money continues to earn interest while we have bought ourselves some breathing room.
Now that the initial panic is over, there is a way to invest our money that won’t keep us up at night or checking the market every hour. There is an investment concept called dollar-cost averaging (DCA). With DCA, we invest our money in smaller, equal chunks on a regular basis – such as once a month – into a diversified group of investments.
For example, if we have $6000 to invest, we can invest $500 per month until it’s gone, which will take one year. The money awaiting future investment isn’t hiding in the mattress. We will keep it in our high-yield money market or savings account so it can earn a bit of interest while awaiting its turn.
The idea behind DCA is that it allows us to ease into investments instead of jumping in all at once. If the price of the investment drops after some of our initial purchases, we can buy some later at a lower price (buying low). If we dump the entire lump into the investment all at once and then the bottom falls out, we’ll be kicking ourselves for not waiting. The flip side of DCA is that when our investment increases in value, we may wish we had invested faster.
Another drawback to DCA is that we may get nervous as we continue to deposit money into an investment that’s dropping in value. The upside in this situation is that we have not invested all of our money at once. So, we have the option of bailing out of what may feel like a sinking ship.
If DCA is our chosen investment method, we should make the deposits automatic so that we are less likely to chicken out should the investment fall after our initial purchases. Most investment firms provide automatic deposit options.
