You have $1,000 and need to figure out what to do with it. Whether it came from a tax refund, a bonus at work or your hard-earned savings, a wise investment strategy could turn that cool grand into a boon for your financial life.
Unfortunately, there isnâ€™t one right answer when it comes to deciding where the money should go. Thatâ€™s because it depends on where youâ€™re starting from. â€śYour financial situation will be critical in determining the best way to invest $1,000,â€ť said Rick Vazza, chartered financial analyst (CFA), certified financial planner (CFP) and president of Driven Wealth Management.
To help you decide which investment is best for you, check out these four options.
Do you owe money on your credit cards or other high-interest debt? If so, an important investment is getting that debt paid down.
â€śPaying off high-interest credit card debt should be your top priority on the road to financial independence,â€ť advised Robert R. Johnson, Ph.D., CFA, chartered alternative investment analyst (CAIA) and professor at Creighton Universityâ€™s Heider College of Business. â€śCredit card debt can be debilitating and can prevent you from improving your financial position.â€ť
When you pay off debt, itâ€™s like you get a guaranteed return on your money since you save on the interest you would have paid if you hadnâ€™t paid off the debt early. For example, if you pay off a loan with a 15% interest rate, youâ€™re essentially earning 15% back since you no longer have to pay interest. The higher the interest rate on your debt, the better the return on the investment you make.
â€śMost cards charge 20% or more on the balance, while the stock market on average returns 7% to 9%,â€ť said Vazza. â€śIt would be best to use that $1,000 to pay down the credit card debt and save money from the high interest youâ€™d otherwise be paying.â€ť
Another great way to invest $1,000 is to put the money aside to protect yourself when bumps in the road arise.
â€śIf the recent government shutdown has taught us anything, itâ€™s the power of an emergency fund,â€ť said Abby Eisenkraft, an enrolled agent and CEO of Choice Tax Solutions. â€śMany people donâ€™t think ahead and never fathom that a paycheck will stop, a boiler will break in January, your AC will conk out in August or that emergency out-of-pocket dental treatment needs to happen now.â€ť
Unfortunately, four in 10 adults wouldnâ€™t be able to come up with $400 to cover an unexpected expense, according to the Federal Reserve. If youâ€™re one of them, you could end up in debt when something relatively minor goes wrong.
Investing your $1,000 in an emergency fund could give you the peace of mind that comes with knowing you could handle a disaster. Plus, it could help you avoid paying a ton of interest when disaster strikes since you wouldnâ€™t have to take out expensive loans to cover costs.
If you already have some cash saved for emergencies and donâ€™t have a ton of high-interest debt, the next best thing to do with your $1,000 may be investing it for your long-term future. And you can do that by putting the funds into a tax-advantaged retirement account.
â€śDepending on your income, Iâ€™d recommend either a traditional or Roth IRAÂ or temporarily bump up your 401(k),â€ť advised Jim White, CFP and founder of J.H. White Financial. â€śEven if coming into an extra $1,000 is just a one-time event, over time, that $1,000 â€” if invested into a retirement savings vehicle â€” will help you meet retirement goals.â€ť
When you put money into a traditional IRA or 401(k), you invest with pretax dollars. This tax savings means saving money actually costs you less.
And thanks to compound interest, it could turn into a big chunk of cash. In fact, $1,000 invested in a 401(k) or IRA today could turn into more than $10,000 if you leave the money invested for 35 years and earn 7% annual returns.
Thereâ€™s no rule that says you need to use your cash right away. In fact, depending upon your situation, you may decide it makes sense to simply save that $1,000 for a bigger purchase, such as a down payment on a home or car.
If you plan on saving the $1,000 and need to access it soon, your best bet may be to put it into a high-yield savings account. That way, your money will be easily accessible, but youâ€™ll earn a better return than you would if you left the cash to languish in your regular bank account.
Ultimately, only you can decide whether to use your $1,000 to pay down debt, build up your emergency fund, prepare for retirement or save for other goals. Whatever you do, make sure you choose wisely so the $1,000 helps you accomplish your objectives.