Picture this: That work bonus has finally hit your account. Your side gig is taking off. Or you get an unexpectedly large tax refund. Now you have an extra $5,000—or close to it—in the bank. (Nice. What could you do with it? An unexpected infusion of money could put you in a better financial position. But only if you use it wisely.
“People tend to think of a $5,000 surprise as bonus play money,” says Fidelity’s director of financial solutions Aliya Padamsee, CFA, CFP®. “But think about using it as an opportunity to get ahead, not to stay in the same place. “.
How you might want to use the money depends on your financial status and goals. Here are some options to help you decide what to do with $5,000.
So you’ve got some extra cash burning a hole in your pocket. Congrats! But before you rush out and blow it all on a fancy new gadget or a weekend getaway, take a moment to consider your options. What’s the best thing to do with your extra money?
The answer, like most things in life, depends. It depends on your financial goals your risk tolerance, and your overall financial situation. But don’t worry I’m here to help you navigate the options and make the best decision for you.
Pay Off High-Interest Debt
This is often the smartest move you can make with your extra cash. High-interest debt, like credit card debt, can eat away at your savings and make it difficult to reach your financial goals By paying off this debt, you’ll free up money that you can then use to invest, save, or spend on other things.
Build Your Emergency Fund
A vital safety net that can help you handle unforeseen costs, such as auto repairs or medical bills, is an emergency fund. Ideally, your emergency fund should cover at least 3-6 months of living expenses. If your emergency fund is pitifully small or nonexistent, think about utilizing your surplus funds to augment it.
Invest for the Future
If you’ve got your high-interest debt under control and you have a solid emergency fund, then it’s time to start thinking about your long-term financial goals. Investing your extra cash is a great way to grow your wealth over time and reach those goals, whether it’s buying a house, retiring early, or leaving a legacy for your loved ones.
There are a variety of investment options available, from stocks and bonds to mutual funds and ETFs The best option for you will depend on your individual circumstances and risk tolerance. If you’re not sure where to start, consider talking to a financial advisor.
Treat Yourself (But Don’t Go Crazy)
Okay, so you’ve been responsible and taken care of your financial priorities. Now it’s time to reward yourself for your hard work! Go ahead and treat yourself to something you’ve been wanting, whether it’s a new outfit, a weekend getaway, or a fancy dinner. Just remember to keep it within reason and don’t blow all your extra cash in one go.
The Bottom Line
The best thing to do with your extra money depends on your individual circumstances and goals. But by following these tips, you can make sure you’re making the most of your hard-earned cash.
Here are some additional things to keep in mind:
- Don’t be afraid to seek help. If you’re not sure what to do with your extra money, talk to a financial advisor. They can help you create a plan that meets your individual needs.
- Don’t put all your eggs in one basket. Diversify your investments to spread out your risk.
- Be patient. Investing is a long-term game. Don’t expect to get rich quick.
- Don’t panic. The market will go up and down. Don’t let short-term fluctuations scare you out of your investments.
Recall that creating and adhering to a plan is the most crucial step. You can attain your financial objectives and lead the life you’ve always desired by taking charge of your finances.
Build your emergency fund
An emergency fund is a reserve of cash you can tap in case of, well, an emergency. Regardless of how big or small your emergency fund is, it makes sense to set aside some of your newfound wealth to start one.
Fidelity advises aiming to save three to six months’ worth of essential expenses (think: major bills and necessities) after your $1,000 cash buffer to help cover you in the event of, say, a job loss or hospital stay. “Three months of savings may be enough if you’re single, have no dependents, and have a steady job,” advises Padamsee. But when you’re the only provider for your family or have a family, it makes sense to have six or even nine months’ worth of savings. “.
It may be convenient to store your emergency fund in your regular bank account. But it is generally a better idea to keep it separate. That way, you avoid dipping into emergency savings for other expenses and goals. These choices can be effective for short-term savings objectives and emergency fund savings, since you might also want to take cash equivalents into account for savings goals that are less than three years away:
High-yield savings account. Regular bank savings accounts typically offer a low rate of return on your investment; instead, consider investing well below 1% of your annual percentage yield (APY), or less than 1% of your balance in interest each year. 1 A high-yield savings account, which typically offers rates several times higher than a bank savings account APY, could help you earn more interest on your money. 2.
With accounts guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250K per depositor, per insured bank, for each account ownership category, you won’t have to worry about losing your money. But you may be limited to a certain number of withdrawals each month.
Money market account. This account type typically combines savings and checking account features. Money market accounts have marginally higher interest rates than savings accounts (they are not the same as money market funds in brokerage accounts). Some banks offer much better rates, but you may need to maintain a certain balance to receive them.
Using a debit card or ATM withdrawals from your money market account may make it easier for you to pay for significant emergency costs. One downside: You may face fees if you withdraw more often than the monthly max.
Money market fund. Compared to stock or bond funds, money market funds are a sort of low-risk mutual fund that is less susceptible to market swings. As you wait for other investment opportunities to present themselves, like in the core position for your brokerage account, they are frequently used as a holding place for assets. You could typically earn a return similar to that of a high-yield savings account.
However, neither the Federal Deposit Insurance Corporation (FDIC) nor any other government organization guarantees nor insures an investment made in a money market fund. Although the fund seeks to preserve the value of your investment at $1. 00 per share, it is possible to lose money by investing in the fund. Similar to other mutual funds, you’ll likely pay a small percentage of your investment as a management fee.
Time your short-term goals to earn more
If you have enough money saved for an emergency, you might want to think about allocating some of your excess funds to short-term savings objectives with a set time horizon. If they dont, keep it in cash equivalents just like you do with your emergency savings.
Certificate of deposit (CD). With FDIC insurance, CDs allow you to lock in interest rates for a specified period of time, like three months or a year. They may pay a slightly higher yield than other FDIC-insured options (see the latest brokered CD rates).
But theres a catch: Youll have to pay penalties if you withdraw your funds early. “Remember that CDs are not fully liquid,” says Padamsee. They may offer a marginally higher yield, but this is only beneficial if you don’t intend to withdraw the funds before the term expires. Therefore, even though CDs aren’t the best option for keeping your entire emergency fund, they do function well if you can predict when you’ll need the money.
What To Do With Extra Money In The Bank?
FAQ
What does Dave Ramsey say to do with your money?
What is the 50 20 30 budget rule?
What can I do with my extra money?
The first thing to do is pay off any high-interest debt, such as credit cards. If you’re in debt, paying it off will free up more money every month and help you avoid costly interest charges. After that, there are several great ways you can use your extra money to build wealth and a better financial future. 1. Boost your emergency fund
What to do with extra $1,000 a month?
For example, if you’re wondering what to do with an extra $1,000 or $500 a month, or just a single amount of $1,000 in the bank, investing in yourself is one of the best things to do with your money… and one of the most effective ways to see a return on that investment. 3. Invest in the Stock Market
How do I make money if I don’t need money?
Look into certificates of deposit (CDs) with your bank, too. With a CD, you promise the bank that you’ll allow them to use your money for a specified time period, and in return, they pay you more interest. This is a great way to make some extra money if you’re sure you won’t need the cash for six months, 12 months, or longer.
How do I protect myself and my money?
To protect yourself and your money, first you need to know where all of your accounts are, including banking, retirement, student loans and credit cards. Then, at the very least, make sure you turn on multi-factor authentication on all of your accounts to provide an extra layer of security.