Source: BIGSTOCK.
Woo-hoo! You find yourself with $1,000, and the world's your oyster. What should you do with it? Upgrade the hotels you're staying in during your next vacation? Buy fancy new rims for your car? Buy a vintage used Nintendo game? Well, those might bring you some pleasure, but consider the following alternatives: four smart things you can do with $1,000 immediately.
Dan Caplinger: Many people end up with found money at this time of year, with tax refunds frequently amounting to $1,000 or more. If you have outstanding debt that's carrying a high interest rate, paying it down is usually the best thing you can do to make that $1,000 work as hard as it can for you.
Many credit cards have interest rates of 15% or more, and it's almost impossible to find any alternative use of your money that will produce enough of a return to compare to the interest savings you can get by paying down such debt. Making only minimum monthly payments can leave you in debt for years, even if you don't make any additional charges, and the amount you'll pay in interest will eventually dwarf the original cost of what you bought. Putting a good-sized lump sum toward getting that debt under control will dramatically accelerate your ability to get out of debt. Then you'll be in an even better position to invest and start making forward progress for your financial future.
Paying down debt isn't everyone's dream for using a tax refund or other found money. But it can be the smartest thing to do, and it can produce the most benefit for you in the long run.
Money can grow tax-free in a Roth IRA. Image source: Pixabay.
Brian Feroldi: If you've got an extra $1,000 lying around, I'd suggest you fund a Roth IRA, my favorite type of retirement account.
Roths differ from traditional IRAs in that you contribute to them with money you've already paid taxes on. That means you're not getting an immediate upfront tax break from Uncle Sam, but instead a tax break down the road: Your money can grow completely free from future taxes. Any capital gains or dividends that your $1,000 produces over time can be accessed tax-free after you retire.
Another huge benefit Roths have over other retirement plans is that you can access your contributions early, penalty free, if you follow several rules. That can allow the Roth to do double duty as a retirement account and an emergency fund.
Just as with other tax breaks, if you make a high income, then you might not be able to take advantage of a Roth IRA. To qualify in the 2015 tax year, your modified adjusted gross income (AGI) has to be less than $116,000 if you are single or less than $183,000 if you are married filing jointly. The contribution limits for a Roth in 2015 were $5,550 if you are under age 50 ($6,500 if you are over), so a $1,000 contribution could go a long way toward helping you max out this great retirement account.
Get your kids into investing now, and it can pay off handsomely later. Image source: Pixabay.
Selena Maranjian: One smart thing you can do with $1,000 is to get your kids started investing. Just one $1,000 investment may not seem like it will do very much, but remember that kids are, by definition, young -- with lots of time. If a 10-year-old makes a one-time investment of $1,000 and leaves it in a broad-market index fund until retiring at age 65, the money will have 55 years to grow! If it grows at 10% annually, on average, it will end up worth almost $190,000.
But that $1,000 can also give your kid(s) a gift worth even more than $190,000: an interest in and appreciation of stock market investing. By making your children money-savvy and financially literate, you'll be setting them up for a healthier financial future.
Start simply by talking with them regularly about money. Share your financial goals and experiences. Discuss your expenses and money management tactics. Discuss any debt you're carrying and how you're paying it off.
Consider opening investment accounts for them at a local brokerage with you as their custodian. Then you can study companies together and buy a few shares of a bunch. Kids will be much more interested in stocks when they have some skin in the game. Choose companies that interest them -- such as, perhaps, Apple, Nike, Disney, Starbucks, Google parent Alphabet, Facebook, Netflix, and Amazon.com. They can learn how the market works by watching their holdings rise and fall in value over time. Follow their holdings in the news together. When a holding makes a big move, see how its stock reacts. Discuss the companies' progress and prospects.
Terrible and costly things sometimes happen. Be prepared with an emergency fund. Image source: Pixabay.
Matt Frankel: All of my colleagues make great suggestions here, but if you don't have an emergency fund yet, that's where I would start. A recent Federal Reserve report found that 47% of Americans couldn't cover a $400 unforeseen expense without borrowing the money or selling something -- if that describes you, you definitely need an emergency fund.
Experts say you should have six months' worth of expenses stashed away in a savings account or other readily accessible place, and you may be surprised at how much this is when you factor in all of your recurring expenses.
Now, it's true that $1,000 won't come close to six months' worth of living expenses. However, you'll be in much better financial shape with that money set aside. This way, next time your car needs a tire, you won't have to create high-interest debt for yourself by charging it, nor will you have to dip into your retirement savings.
If you have a decent cushion in the bank, follow one of the other three suggestions here. Pay down your credit cards, start an investment account for your children, or save for your own retirement. If not, the best thing to do with $1,000 is to leave it alone in a readily accessible place.
