IFYF Monthly Investing Messages

Personal Finance October 31, 2014|Print

 

 


 

Investing For Your Future Monthly Message

November 2014

Barbara O’Neill, Extension Specialist in Financial Resource Management

Rutgers Cooperative Extension

oneill@aesop.rutgers.edu

How to Invest $1,000

It is not uncommon for people to receive extra income at the end of the year. Some workers receive a year-end bonus and more affluent ones may have reached the maximum taxable earnings limit for Social Security (FICA tax) deductions ($117,000 in 2014) and/or the maximum amount that can be contributed to a tax-deferred TSP, 401(k), or 403(b) plan ($17,500 if under age 50; $23,000 if age 50+). There’s also the possibility of receiving a generous holiday cash gift.

How should a year-end cash windfall be used? Like most financial planning questions, the best answer is “it depends.” Some key factors include a person’s age, financial goals, net worth, cash flow, and amount of existing savings and investments. Let’s assume that someone will receive an extra $1,000 by the end of December and wants to invest it wisely. Below are seven suggestions for investing a cash windfall:

  • Fund an Emergency Reserve- Experts advise setting aside at least three to six months expenses in a safe, accessible account such as a money market mutual fund or bank savings account. That’s $6,000 to $12,000 for those spending $2,000 per month. Households with only one earner, a self-employed earner, or someone planning to quit a job to start a business should set aside more (e.g., 6 to 12 months expenses). An emergency fund provides ready cash when “stuff happens” in life (e.g., sick children, injured pets, car repairs, and unemployment).

  • Reduce Debt- Repay the outstanding balance on high-interest loans or credit cards. Start with debts that charge the highest interest. For example, many department store credit cards charge annual percentage rates or APRs (interest) of 20%+.  Paying off a 22% APR credit card is equivalent to earning an 22% investment return: guaranteed, risk-free, and tax-free. Another debt to consider paying down with extra cash is a home mortgage.

  • Invest for Retirement- Put your year-end cash windfall in a Roth or traditional IRA. Any amount that you invest will grow significantly after several decades of compound interest. To learn more about both types of IRAs, see http://www.extension.org/pages/9664/investing-unit-7:-retirement-plans#.UyrjBE1OWM8. Taxpayers have until the tax filing deadline during the following year (typically April 15) to fund an IRA for the previous tax year.

  • Invest in Yourself- Economists refer to workers’ knowledge, experiences, and skills as “human capital” and $1,000 can be used to maintain or improve it. Some examples include attending a professional conference, paying for credits for a college degree program, or taking courses or training for career advancement or to switch to a new line of work.

  • Remodel Your Home- If you plan to stay put for a while, consider using a year-end cash windfall to make a small home renovation such as new carpeting, flooring, or bathroom fixtures. If you plan to move soon, use the money for cosmetic changes that will increase your home’s resale value. Examples include interior painting, new doors, and outdoor landscaping in the spring and summer months.

  • Open a Mutual Fund Account- Many mutual funds allow investors to open up an account for $1,000 or less with $25 to $100 subsequent minimum deposits. By investing in a mutual fund, investors receive broad diversification of their invested cash and professional management of the mutual fund’s investment portfolio. Other investment products also have low initial required deposits. For additional information about investments that can be purchased with only $1,000, see http://www.investopedia.com/articles/basics/06/invest1000.asp.

  • See a Financial Advisor- An extra $1,000 can be well spent by seeing a financial advisor to get answers to your questions and direction for the future. Many financial planners charge hourly rates like lawyers do and some focus their practices exclusively on middle-income households. To save time (and, therefore, money), go prepared for a financial planning appointment with a list of questions, copies of relevant documents (e.g., current 401(k) statement and copy of latest tax return), and completed financial statements (e.g., net worth and cash flow). If you lack current estate planning documents such as a will, living will, or durable power of attorney, see a lawyer to get these prepared.

    In summary, an extra $1,000 or so at year-end is certainly not enough to quit a job for but it is enough to provide significant financial benefits. Whether you choose to invest in your home or yourself or a mutual fund or other investment product, carefully spend any extra cash that you receive by year-end. A cash windfall is a wonderful gift. Use it wisely.

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