Picture this: That work bonus has finally hit your account. Your side gig is taking off. Or you get an unexpectedly large tax refund. You now have an extra $5,000, or nearly that, in your bank account. (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®. However, consider using it as a chance to advance rather than to remain where you are. “.
Your financial situation and aspirations will determine how you may wish to use the funds. These choices will assist you in determining what to do with $5,000.
Congratulations! You’ve come into some extra cash, whether it’s a bonus, a tax refund, or a side hustle windfall. Now, the question arises: what should you do with it? The answer depends on your financial goals, risk tolerance, and time horizon. This guide will explore various options to help you make the most of your newfound funds.
1. Build an Emergency Fund
An emergency fund is your financial safety net a buffer against unexpected expenses like car repairs medical bills, or job loss. Experts recommend having at least 3-6 months’ worth of living expenses readily available in an easily accessible account. If you don’t have an emergency fund yet, prioritize allocating a portion of your extra cash to building one. This will provide peace of mind and prevent you from resorting to high-interest debt in times of need.
2. Pay Off High-Interest Debt
If you have outstanding credit card debt or other loans with high interest rates consider using your extra cash to pay them off. This will save you money on interest charges and improve your credit score. Prioritize paying off debts with the highest interest rates first, as this will have the biggest impact on your overall financial health.
3. Invest for the Future
Once you have a solid emergency fund and have addressed any high-interest debt, you can start thinking about investing for the future. Investing allows you to grow your money over time and reach your long-term financial goals, such as retirement or a down payment on a house. There are various investment options available, each with its own risk and return profile.
- Stocks: Represent ownership in companies and offer the potential for high returns but also carry higher risk.
- Bonds: Loans to governments or corporations, offering regular interest payments and generally considered less risky than stocks.
- Mutual Funds: Baskets of stocks or bonds that offer diversification and professional management.
- ETFs (Exchange-Traded Funds): Similar to mutual funds but traded on stock exchanges like individual stocks.
- Target-Date Funds: Automatically adjust their asset allocation as the target retirement date approaches, becoming more conservative over time.
Choosing the right investment option depends on your individual circumstances and risk tolerance. It’s crucial to do your research and understand the risks involved before investing. Consider seeking guidance from a financial advisor if you need help navigating the investment landscape.
4. Treat Yourself (Moderately)
While it’s important to be responsible with your money it’s also okay to treat yourself occasionally. Use a small portion of your extra cash to enjoy something you’ve been wanting, whether it’s a nice dinner a weekend getaway, or a new gadget. However, remember to keep your spending in check and avoid overindulging, as this can quickly deplete your savings.
5. Consider Short-Term Savings Goals
If you have specific short-term goals, such as a down payment on a car or a vacation, you can use your extra cash to start saving towards them. Consider putting your money in a high-yield savings account or a money market account, which typically offer higher interest rates than traditional savings accounts. This will allow your money to grow while remaining readily accessible when you need it.
6. Contribute to Retirement Accounts
If you have the opportunity to contribute to a retirement account, such as a 401(k) or IRA, consider doing so with your extra cash. This will not only help you save for your future but may also offer tax advantages. Many employers offer matching contributions to retirement accounts, essentially giving you free money. Be sure to take advantage of these opportunities to maximize your retirement savings.
7. Donate to Charity
If you’re feeling generous, consider donating a portion of your extra cash to a worthy cause. This is a great way to give back to your community and support organizations that are making a difference in the world.
Ultimately, the best way to use your extra cash depends on your individual circumstances and financial goals. By carefully considering your options and making informed decisions, you can ensure that you’re making the most of your money and working towards a brighter financial future. Remember, it’s important to balance short-term needs with long-term goals and to make choices that align with your values and risk tolerance.
Get on solid financial footing
Have a cash buffer. Make sure you always have at least $1,000—or one month’s rent, whichever is higher—in a readily accessible account. In this manner, you wouldn’t have to put off paying other bills or accumulate debt on your credit card in order to cover an unforeseen cost, like new brakes or dental work.
Pay down high-interest credit card debt. If so, knowing how much money is owed on your credit cards may help you decide what to do with $5,000. Since credit card debt accrues interest daily, it may be beneficial to make a sizable payment immediately away. If you owe money on multiple credit cards, think about making larger payments on the card with the highest interest rate first.
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 not, place it in cash equivalents and manage it similarly to your emergency fund.
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. Compared to other FDIC-insured options, they might offer a marginally higher yield (check the most recent brokered CD rates).
However, there’s a catch: If you take out your money early, you’ll have to pay penalties. “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.
3 Things to Do With Your Cash Right Now
FAQ
What is the next best thing to cash?
What is the safest thing to do with cash?
How much cash should I hold right now?
What to do with cash savings when rates rise?
Here are four things to do with cash savings when rates rise. Typically, brick-and-mortar banks offer little interest on cash deposits. Keeping a large amount of cash in one of these accounts these days means missing out on sizable risk-free returns. High-yield savings and money market accounts are currently offering rates between 2-3% annually.
Should you leave cash in a savings account?
At current rates, cash has lost more than 8% of its value since last year, and the average savings account yield of 0.06%, according to Bankrate, is doing little to offset that. “You’re automatically taking a risk by leaving money in cash,” says Michael Tanney, a senior managing director at Magnus Financial Group LLC.
Is cash worth something again?
Good news is hard to find in the financial markets this year. But there is one silver lining: cash is worth something again. So if you’re still keeping savings in a bank account yielding .01% annually, you’re missing out. Here are four things to do with cash savings when rates rise.
What if you have cash sitting at a big bank paying you nothing?
If you have some cash sitting at the big bank paying you nothing, here are a few ideas to take advantage of surging interest rates. Rates are as of Feb. 1 or 2, 2023, with the amounts they translate to in annual interest for each $10,000 invested. 1. High-paying money market accounts