One of the best feelings in the world is having extra money accessible to you. It could be from a birthday or graduation present, from last year’s tax refund or just having spent less money last month than you took home. Having this extra cash is great but only if you use it properly. You see, when many people receive any windfall of money they see it differently than the money they get through their paycheck and this tends to sway them into using it for frivolous items. However, spending irresponsibly will never get you ahead financially I want to share with you seven things you must do, in order, if you have $1,000 to spare.
Now that you have access to an extra $1,000, you’re in a great position to make a wise financial decision. What I want to do now is go through 7 smart ways to use that money with the first four being absolute necessities to have covered off with the final three being less mandatory. However, all seven have the potential to put you in a better financial position than you are currently in so let’s get started.
Option #1: Pay Down Debt
While this first option is not as exciting as buying a new phone or gaming system, it could very well be the most financially beneficial way to use your extra $1,000. What I recommend is focusing this cash on your highest interest debt and for many people this is their credit card balances. You see, debts like mortgage loans and car loans tend to offer low interest rates since they’re secured by collateral, so continuing to carry these debt burdens won’t be as costly as the ones attached to your credit cards. The average credit card rate in the U.S. is over 17%, which makes credit card debt an extremely high priority.
Like I said, spending that extra cash on debt isn’t exciting but it is a way to stretch that money further. Consider this. If you carry a $1,000 balance on your credit card at 28.8% interest, your minimum payment is $30 per month. If you only paid the minimum, at that rate, it would take you 68 months, or over 5 years to pay off that $1,000 balance and you would pay about $1,040 of interest on a $1,000 debt. So instead of paying just the minimum, if you can pay down that balance in one shot, you can literally double the value of that money when you factor in the interest you’d be saving!
Now, if you don’t carry credit card debt then the next obvious choice would be to use that money to pay down your other balances. This could be your mortgage, student loans or lines of credit. I always recommend paying down the ones with the highest interest rates first but from a psychological standpoint, it may make more sense for you to eliminate smaller balances first.
Option #2: Creating An Emergency Fund
I’ve said it a thousand times, but I’ll say it again, everyone needs an emergency fund. Now, the size of this fund may differ from person to person, but the reality is that we are all susceptible to emergency events and sadly these events usually have a financial component attached to them. From hurting yourself and having to go to the hospital to having your car break down, you never know when you’ll need to come up with cash in a hurry and this is why another great use of that $1,000 is to create or further supplement your emergency fund!
Conventional wisdom suggests you keep between three to six months of living expenses in an emergency fund however I believe that stashing away a year’s worth of cash is more advisable as it provides you extra peace of mind. Now, if you don’t already have an emergency fund created, then you’re probably wondering where you should store that cash. What I recommend is that you place it in a high-yield savings account. You can earn between 1.5% and 2.5% interest in today’s accounts through banks like CIT Bank, which might at least keep pace with inflation. Savings accounts are FDIC-insured and 100% liquid, giving you instant access to your money in an emergency.
But your emergency fund isn’t limited to savings accounts. Some people keep several layers of accounts they can draw on in an emergency to minimize the opportunity cost of keeping so much cash in relatively low-yield accounts. Examples of additional layers include money market accounts or funds, short-term government bonds, low-volatility stock funds, and unused credit cards.
Given that I follow my own advice when it comes to emergency funds, I keep one year’s worth of expenses handy however only half of it sits in a high-interest savings account with the other half residing in low-volatility investments. This way I can ensure that I have access to this cash whenever I may need it with it still gaining some appreciation while it waits to be used.
Option #3: Funding Your Retirement
While you may want to spend and enjoy that $1,000 now, if you were to invest it for retirement, I am sure your future self would thank you. Just as everyone needs an emergency fund, everyone needs to save for retirement. Sooner or later, the day comes when you’re no longer willing or able to work. And given the increase in older workers being pushed out of their jobs, we all have less control over the timing of our retirement than we realize.
One easy way to invest for retirement is an individual retirement account or IRA. These accounts come with strong tax benefits to sweeten the deal. Money contributed to traditional IRAs is deductible immediately, while money contributed to a Roth IRA grows tax-free, plus you owe no taxes on withdrawals in retirement. Best of all, these accounts are extremely simple to open. You can open them through any investment brokerage, such as M1 Finance, Robinhood, or Vanguard. It takes about five minutes to open an account online, and you can start investing for retirement immediately.
Again, I know this option isn’t that exciting but that $1,000, when invested over time, can grow to a sizeable amount. In fact, if you were to invest that $1,000 into the stock market and it were to yield the market’s historical return of 7%, in 30 years, that initial amount would have earned over $7,000 in interest for a total value of $8,116.50. Therefore, if you want to stretch that $1,000 as much as possible, one way to can use it is by placing it in your retirement account!
Option #4: Build A Passive Income Stream
Remember the tale of the golden goose that laid a golden egg every day? That’s how passive income works. You buy an investment that keeps paying you income, month after month, year after year. With enough golden geese, your day job becomes optional. That’s the key to financial independence: building enough passive income streams that you can pay your bills with them alone.
Plus, income arrives even while you’re sleeping, playing video games or are out at the bar with your friends. This passive income can come from bonds, rental properties, REITs, dividends from stocks, businesses, and many other sources. However, if these passive income streams don’t appeal to you, then why not invest that $1,000 into building your own.
It could be investing that money into starting a blog, buying equipment to build a YouTube channel or setting up a business that you can run while being hands-off. Ultimately, it never hurts to have more income coming your way and if you can avoid adding more working hours to your day while still reaping financial benefits then this may be the best way for you to use your extra $1,000.
Option #5: Save For A Down Payment
If you don’t already own a home then chances are at some point you will. While not everyone is a good fit for homeownership, it is a great vehicle to use to either live in and enjoy or rent out to make you some extra cash. However, the bank will only lend you so much money when you go to make this purchase which means that you will be on the hook for at least some of the purchase price. This is where saving for a down payment comes into play.
You see, there are rules when it comes to obtaining a mortgage. Generally, you can buy a house with as little as 5% down however there are a few drawbacks to doing this which I want to briefly go over. First, with a smaller down payment, you will end up having higher mortgage payments every month and this will restrict your cash flow and make it harder to cover your other bills. Second, if you put down less than 20% of the purchase price of the home, you will be subjecting yourself to private mortgage insurance or PMI, which will be another cost you must bare in the purchase price of your home. Finally, taking out a larger mortgage also means paying more interest over time which is money you will simply never get back. This is why it pays to put down more money on a home and with that $1,000 extra you have, you can start to build your down payment nest egg.
Option #6: Improve Your Health Coverage
I always say that if you don’t have your health then you have nothing and the unfortunate reality is that as we age, our health will naturally decline. Luckily, there is health coverage that can help offset those costs but not everyone has access to this support. If you have bare-bones health coverage — or, worse, none at all — now may be a good time to boost your coverage. We all think we’re invulnerable until the universe proves we aren’t.
That could mean buying a traditional health insurance plan. But it could also mean opening a health savings account (HSA) to set aside money tax-free to supplement a high-deductible insurance plan. In fact, HSAs offer the best tax benefits of any tax-sheltered accounts, with triple tax protection: Your contributions are deductible, the money grows tax-free, and withdrawals are tax-free when used for health-related expenses.
Option #7: Invest In Yourself
The final way you could use that $1,000 is to invest in yourself. While we often look outward when it comes to spending money, there is no doubt that investing in your most valuable asset, aka yourself, is another smart financial decision. Some of the ways I have invested in myself in the past include buying books, going to conferences, taking courses or extending my level of education. In fact, the best part about these options for self-improvement is that the $1,000 can go a long way into improving your current skillset. Most books cost less than $25 and many conferences can be attended for a couple hundred bucks. Past books that I’ve read have literally changed the way I live my life not only from a business perspective but holistically. Investing in yourself can be a way to improve your ability to make connections, scale up your business or make more money.