It's not every day that an extra $1,000 lands in your lap. If you're looking at some newfound money, here are a few wise ways to spend it.
1. Start or beef up your emergency fund
In a 2016 GoBankingRates survey, 69% of Americans admitted to having less than $1,000 in a savings account. Worse yet, 34% said they have no savings at all. No matter your age, family dynamic, or housing situation, it's imperative that you have three to six months' worth of living expenses on hand at all times. And while $1,000 won't cover that savings target in its entirety, it'll at least get you closer.
IMAGE SOURCE: GETTY IMAGES.
2. Pay off costly credit card debt
Since 2005, the average credit card interest rate has fluctuated between 12% and 16%. Carrying a credit card balance means losing money on a daily basis by default. If your card charges 14% interest, applying that $1,000 toward your existing debt can save you a cool $77 if you pay off that portion of your balance immediately rather than carry it an additional year.
3. Fund last year's (or this year's!) IRA
Just because we're well into 2017 doesn't mean you're out of time to fund to last year's IRA, and contributing $1,000 could shave a few hundred off your tax bill. Traditional IRA contributions are tax-deductible, and your actual savings are based on your effective tax rate. If you put $1,000 into your IRA and have an effective tax rate of 28%, you'll lower your tax bill by $280.
Of course, you could also apply that money toward this year's IRA, but if you haven't maxed out your contributions for the previous tax year, it pays to do that first. You only have until April 18 (this year's tax filing deadline) to fund your 2016 IRA, whereas you have until April 2018 to contribute to this year's account. Since you still have plenty of opportunities to save more money this year, you might get well get the immediate tax break on your 2016 return.
4. Pay your tax bill
Though the majority of filers get a refund during tax season, around 25% end up owing money to the IRS. If you're sitting on $1,000, you'd be wise to apply it to your outstanding bill. For every day the IRS waits on that money past the April 18 filing deadline, you'll accrue interest charges to the tune of 0.5% per month, up to 25%. You're better off knocking out that bill and nipping those penalties in the bud.
5. Save for a home
Though $1,000 may not seem like it'll make a dent in your home's down payment, every dollar you save brings you one step closer to that 20% threshold, and that's important for two reasons. First, putting 20% down will help you avoid private mortgage insurance, or PMI, which makes it even more expensive to own a home. Additionally, the more money you pay for your home up front, the less you'll have to borrow, and the less you'll spend on interest over the life of your loan.
6. Start investing
In a recent Harris poll, 40% of young Americans said they don't invest in stocks because they simply don't have the money. But you don't need to be rolling in cash to dabble in the stock market. In fact, $1,000 gives you plenty of opportunity to get acclimated to the market, and if you invest that money wisely, you'll have a lot to gain in the long run.
Imagine your $1,000 portfolio generates an average yearly return of 8% over the course of 40 years. (The stock market's historical average is slightly higher, so this is a perfectly reasonable assumption.) Even if you don't add another dime, you'll still be sitting on close to $22,000 in four decades' time.
7. Buy better health coverage
If you're self-employed or don't have health insurance through an employer, it's up to you to foot the bill for whatever plan you choose. Unfortunately, countless Americans skimp on healthcare because they can't afford the high premiums. But if you suddenly find yourself $1,000 richer, upgrading your health plan could be a smart move, especially if you've been putting off treatment or diagnostic testing for lack of adequate coverage. In fact, better health insurance may end up saving you a fair amount of money in the long run, since it could help you identify and get ahead of medical issues before they get worse.
8. Purchase life insurance
You don't need to be rich, have kids, or own a home to need life insurance -- yet an alarming number of Americans are currently underinsured. Bankrate reports that only 60% of Americans have a life insurance policy, but of those, nearly half have inadequate coverage. If you have an extra $1,000 lying around, why not use it to buy yourself and your loved ones a little extra peace of mind?
Tempting as it may be to spend that $1,000 on clothing, gadgets, or the vacation you've been dreaming about, you're far better off using that money responsibly. While you'll miss out on the instant gratification so many of us crave, you'll feel good knowing that you spent that money prudently.
