What would you do with $1,000 if you were given money unexpectedly and told to invest it? Often, when we hear the word “investment,” we immediately think of stocks and bonds. There are many other ways to invest money, however, especially if the word “invest” is interpreted broadly as any use of money that results in increased future value to yourself or others.
Below are fifteen solid ways to use a $1,000 windfall to increase your financial health:
1. Pay off high-cost debt (e.g., credit card bills). Paying off an 18% credit card is equivalent to earning a guaranteed, tax-free, 18% return. No other investment can make this claim.
2. Start or replenish an emergency fund containing at least 3 to 6 months’ expenses. Some financial experts are recommending even more (e.g., 8 months’ expenses) when unemployment rates are high.
3. Start or increase deposits to tax-deferred employer savings (e.g., a 401(k) plan). Use your refund to offset the reduced take-home pay that will result from making increased plan contributions.
4. Fund a traditional or Roth individual retirement account (IRA). The maximum contribution allowed in 2010 is $5,000 plus an additional $1,000 for workers age 50 and over ($6,000 total). A deposit of $1,000 is a good way to get started. Any amount of savings is better than none.
5. Start or increase deposits to a 529-college savings plan for your children or grandchildren. For information about available plan options, see the College Savings Plans Network Web site: www.collegesavings.org.
6. Refinance your mortgage, if interest rates have dropped, and use the refund to pay necessary closing costs (e.g., application fee, title insurance, attorney, etc.).
7. Make extra principal payments on your mortgage to shorten its term and lower the total cost. To determine how much money you can save, check an online mortgage calculator such as http://www.hsh.com/calc-amort.html.
8. Invest in your home with improvements that have a high payback, such as landscaping and bathroom or kitchen upgrades.
9. Purchase necessary business equipment (e.g., a new computer) if you are self-employed or a salaried employee who needs a computer to work productively at home.
10. Buy a needed “big ticket” item, such furniture or a major appliance, with cash instead of using a credit card or rent-to-own store.
11. Purchase a few hours of a certified financial planner’s time to get advice and a financial check-up. Go prepared with a list of questions and net worth and cash flow statements.
12. Donate all or part of your cash windfall to support a worthwhile charity and receive a tax write-off.
13. Take a college course or attend a professional conference to update your job skills.
14. Encourage a child to save by using all or part of the cash windfall to match the child’s savings.
15. Invest in your health. Buy a treadmill for year-round exercise and/or use the money for out-of-pocket health care expenses such as prescription drug copayments and co-insurance on health screening exams.
