Did you win a mini-lottery? Get a huge birthday gift? Have a month with drastically lower spending? Whatever the reason, congratulations on the extra $1,000. Now don't blow it!
Here are 10 smart ideas for how you can use that extra cash:
1. Pay off high-interest debt
This is mentioned first for a reason: you should treat high-interest debt as if it were a five-alarm fire. Generally, we'll define this as any type of debt with an interest rate over 8%.
The long-term consequences of keeping these accounts open can wreak havoc on your financial life. Consider that the average interest rate on a credit card is 15.07% right now. If you don't pay off the $1,000 you owe today, then that debt could swell to $1,150 after a year -- and more than double to $2,020 after five years!
2. Build an emergency fund
As the bumper stickers say: "Stuff" Happens! We never know when, where, or why, but you can rest assured that at some point in the next decade or two, you'll find yourself in a situation where you'll thank yourself for starting an emergency fund. If a dire financial situation does arise, and you don't have resources available, you'll be forced to take on high-interest debt, and you'll find yourself back at square one.
Keep in mind that $1,000 alone isn't enough to fund an emergency account. Experts generally suggest having enough set aside to cover basic expenses for three to six months with no income.
3. Make sure you have the appropriate insurance
There's no need to pay top dollar for the type of insurance that will cover absolutely everything you might lose in case of an accident. But you should have reasonable coverage for your home, car, and anything else that you'd have a hard time replacing if it disappeared tomorrow.
To give you an idea of how far $1,000 could go, consider that if you haven't had an accident in the past three years and you're over 30, this could cover as much as 14 months of car insurance. If you're looking for renters' insurance, your pile of cash could give you five whole years of coverage!
4. Put money in a traditional or Roth individual retirement account (IRA)
The average retired worker in American receives about $16,000 per year from Social Security. If that's enough income for you to live happily on when you retire, then my hat's off to you! But if it's not, then you need to start saving -- now.
You can put up to $5,500 per year into a traditional and/or Roth IRA, or $6,500 if you're over age 50. A contribution to the former reduces your taxes today, but you'll pay when you withdraw it in retirement. The latter is taxed now, and all growth and distributions are tax-free in retirement.
There are income limitations that may prevent some people from enjoying the full benefits of these investment vehicles, and for certain people one may be superior to the other. For more on those distinctions, check out our article that dives deeper into IRAs.
Whichever you choose, they're both good deals.
5. Contribute to a Health Savings Account (HSA)
These accounts have only been around since 2003, but they are the most tax-advantaged vehicles you'll ever get your hands on. The money you put in -- up to $3,350 for individuals and $6,750 for families, with an extra $1,000 for those over age 55 -- is tax-deductible. That money can be invested, and all growth is tax-free. And when you take the money out, it's also untaxed -- so long as it's used for qualified medical expenses.
Not everyone can get an HSA. You need to have a high-deductible health plan, defined as having a minimum deductible of $1,300 ($2,600 for families), as well as an out-of-pocket maximum of $6,550 ($13,100 for families).
6. Ever heard of a Coverdell?
Most people know about 529 college savings plans, but too few know about Coverdell Education Savings Accounts (ESAs). These plans work much like Roth IRAs: The money you put in is taxed, but all growth and distributions are tax-free. Just as importantly, you have full control over where the money is invested.
The limits for contributions top out at $2,000 in 2016. And it's important to note that the money can be used for any qualified education expense -- not just college-related expenses. So if your kid's high school tuition is steep, consider tapping the ESA.
7. Don't forget to actually buy stock
Of course, once you open an IRA, HSA, or ESA, you actually have to invest that money. The easiest and perhaps safest way would be to buy four shares of the SPDR S&P 500 ETF (NYSEMKT:SPY), an exchange-traded fund that gives you exposure to the 500 largest publicly traded companies in America.
But if you ask me, there are better places for your money. Consider that with your $1,000 you could buy:
- 1 share of Amazon, currently trading for about $770.
- 1 share of Alphabet Class C Shares, also trading for about $770.
- 7 shares of Facebook, currently trading for about $130 per share.
- 18 shares of Starbucks, currently trading for about $55 per share.
I picked these four because they are industry titans (Alphabet is better known as "Google") that have solid and sustainable competitive advantages. They also happen to be four of my five largest personal holdings, so my money is squarely where my mouth is.
8. Spend it on an experience
If you've already covered the bases with the previous seven suggestions, and you really feel like spending that money, then I'd encourage you to consider using it on an experience instead of a new toy you'll soon grow tired of.
Research has shown that the happiness boost from novel experiences lasts far longer than that from a new physical purchase. And with $1,000, you could easily take a nice vacation abroad. For instance, right now you can buy two round-trip tickets to Costa Rica (from Chicago) and beach lodging (via Airbnb) in November for $1,047!
9. Donate it to a worthy cause
As with spending money on an experience, research has also shown that you derive much more pleasure from giving money away than from simply taking it in. Research pioneered by Elizabeth Dunn at the University of British Colombia has found that once your basic needs are met, "higher prosocial spending was associated with significantly greater happiness."
While the tax advantages that go along with donating to a qualified non-profit are nice, the knowledge that you're doing good for your community is the real benefit here.
10. Practice awesome random acts of kindness
You might think it sounds crazy, but consider this:
If you take that $1,000 and split it 52 ways -- one for every week of the year -- you get $19.23. Put another two pennies in, and that's 77 quarters. Once per week, take your son, daughter, grandkids (whoever!) downtown, and start plugging parking meters that are about to run out. Or maybe pick up the tab for a diner at the next table over at the deli. Much like charitable donations, these random acts of kindness are win-win situations for everyone involved. And because you do it every week, the benefits spread themselves out over an entire year.