You’ve finally made the decision to find some extra money and save it. But now you’re wondering what to do with this money. Should you throw it in a savings account? Or try investing it. There are many ways to use this money wisely, but they depend on your situation and financial goals.
It can be hard to decide what to prioritize when you have this money so I created a step-by-step guide listing out your options.
Invest In Yourself
This is such an overlooked option for people. So many want to see their money grow and work towards their financial goals. But this may put you ahead of the others. Investing in yourself, whether that’s buying some personal finance books to increase your financial intelligence or getting your real estate license. There are many ways to spend money on yourself that will increase your chances of success in life.
Taking the time and the money to learn a skill that will put you ahead or live your life financially smarter is the best investment you can make. You could lower the chances of mistakes when building towards financial freedom and learning to stay out of debt.
Emergency Fund
Before any saving or investing goes on, you should prioritize building an emergency fund. You never know what life may throw your way; so building that chunk of cash for those situations may be what prevents you from falling into debt.
Financial professionals recommend saving 3 to 6 months worth of living expenses, but with $1,000 you can create a solid foundation to build from. Dave Ramsey actually suggest saving $1,000 before diving in paying off debt.
59% of Americans aren’t able to handle a $1,000 emergency expense, so let’s beat those odds and be one of the 41% of people. Being prepared for those unknown factors in life are what keep you ahead and not falling off your path to financial freedom.
Pay Off Debt
This should be listed first. If you have debt, pay it off. Mortgage debt and student loans are a different situation, but consumer debt needs to be handled. That pesky little mosquito called debt will continue to eat at you until you are backed into a corner.
It’s the most debilitating situation you can be in financially and I wouldn’t wish it upon my worst enemy. That feeling of anxiety and disappointment in not able to get past those minimum payments and see any real progress eats away at you.
If you have any consumer debt, throw that $1,000 at it and breath a sigh of relief. You are now one step closer to achieving true freedom. Having enough money to retire on is nice, but going through life with no debt is more exhilarating.
Generate Interest
Another option to consider is to open a high yield savings account or CD to save your money. This is a great option to earn a little interest and keep your money close. With these accounts you are normally required to keep it in the account for a set period of time, unless you want to get a fee for early withdrawal.
It provides the highest interest rates among savings accounts, but is not as accessible as other accounts in your bank. Weigh your options and determine if you can spare to have that money out of your hands for a while or if it’s better served in a regular savings account.
Starting Investing
This is my favorite part. Use your $1,000 to start investing in the stock market. Buying equity in a company, no matter the percentage is a cool idea and seeing that account grow over time from compound interest can be addicting.
My favorite breakdown would be the following to get started:
$350 would be investing in VOO. This covers the entire stock market in its entirety and a good stable index fund to set the foundation for your portfolio. There are many other identical funds, so it would depend on your preference.
$150 invested in IJR. This is a small cap index fund, which is comprised of companies whose market capitalization is smaller, typically under $1 billion. These stocks are smaller, but you can typically see larger growth. I figure this percentage will decrease as I get older, to be more conservative with my investments.
$100 invested in AGG. An index fund comprised of bonds can provide a stable base for your portfolio. You will typically see smaller growth and interest rates, but your losses are also minimized.
$100 invested in IXUS. This is an index fund made of international stocks. We always prioritize companies in the US, but there are plenty of companies overseas that can provide great growth for our portfolio.
$300 invested in individual stocks. I typically aim for about 70% index funds and 30% individual stocks. Find companies you truly believe in and invest. Only those that you love and understand should be considered. I prefer more stable and known companies to invest in.
529 Plan
Another route to take is to consider the kids, if you have any. Try putting that $1,000 into a 529 plan for your kids’ college tuition in the future. Student loan debt is something that stays with most of us until we are much older.
This is a triple taxed account, where you pay no taxes to put your money in; it grows tax-free and is withdrawn tax-free. That is as long as it’s used for college related expenses.
Helping your kids have even a little less student loan debt can help put them ahead and closer to finding financial success for them. Helping your children this way is a great idea, or say screw those kids. We had it worse and they’re spoiled enough and stick with investing in the stock market. It’s all your decision.
Final Thoughts
There are many ways to spend that $1,000, but find what is best for you and your life. Whether it’s saving for an emergency, killing off that debt or investing in stocks. Remember to do all your own research to prepare and have fun!
