An unexpectedly large birthday gift, a cash bonus at work, a bequest from a deceased relative. You just never know when you might find yourself with $1,000 or more that isn’t committed to your current budget.
What to do with it? David Bach, New York Times bestselling author and co-founder of AE Wealth Management, has three suggestions that will make the gift more valuable than it appears on the surface. (Sure, allow yourself a little splurge, but don’t blow the whole amount.)
• Build up your rainy day fund. If you haven’t yet reached a goal of having six months’ living expenses on hand in case of a financial emergency, you can buy another $1,000 (or whatever amount) of mind’s ease. A safety net can spare you a dilemma when life takes a sharp right turn and you lose your job, have a medical emergency, car repairs – any one of those little clinkers that make life interesting. Your emergency fund will grow faster if you put it into a high-yield online savings account, or a money market account that pays reasonable interest.
• Increase your 401(k). The more you set aside in your employer-sponsored retirement account, the better. Use your windfall to increase your contribution to the retirement plan by 2 percent. Especially if your employer matches a set amount of the contribution, you’ll have a deeper cushion when you retire. A 401(k) offers significant tax advantages.
• Open a “dream account”. If you are looking into the future and seeing yourself at a Super Bowl game, signing up for grad school, traveling outside the country – you name it – a bit of unexpected money can give you a jump start. Open an investment account specifically for that dream. Commit yourself to adding to the amount regularly and before you know it, you are en route to the end point of that goal.