The past year hasn’t exactly been easy on anyone. However, if you’re like millions of Americans, you may have something to get excited about: extra cash courtesy of a stimulus check, tax return, or bonus.
But why rely on luck when it comes to what you do with these unexpected funds? Making smart spending decisions can help you get the most long-term value out of your windfall.
Pay Off Any High-Interest Debt
Unlike the low interest rates common for mortgages and student loans, interest rates for credit cards can be cripplingly high. Using your stimulus check, bonus, or tax return to pay your debt down (or off!) will not only give you an excellent rate of return, but you’ll also be working toward eliminating a monthly expense in the process. So while you may feel like you have nothing to show for it in the short term, the benefits of paying off credit card debt are manifold.
Put It Toward Your Retirement
Whether you’re just getting started or you want to give your existing portfolio a boost, saving for retirement is always a wise move — especially if you don’t need the money for anything else. Depending on your financial profile, goals, and preferences, your investing options include a traditional IRA, Roth IRA, or the stock market.
Wherever you are on your journey to retirement, the amount you contribute has a direct impact on how comfortable you’ll be when you retire. And while it may not be the flashiest way to spend your money, you won’t regret it.
Make Strategic Home Improvements
New windows and doors offer a host of benefits for homeowners, including increasing your home value, enhancing safety and security, reducing dust and allergies, reducing drafts and improving comfort, more peace and quiet, a beautified view, improved energy efficiency, and easier, more convenient cleaning. In areas with extreme temperatures, new windows and doors can stretch your dollars even further by making life easier on your HVAC system.
The benefits aren’t limited to you, either. An investment in new windows and doors is also an investment in the environment.
Pad Your Emergency Fund
If 2020 taught us anything, it’s that we can’t predict everything in life. The past year has also reinforced the need for a cushion in the case of everything from the loss of your job to medical expenses. But just because the light at the end of the COVID tunnel may be in sight doesn’t mean there’s not another emergency on the horizon.
To protect yourself, considering using your extra cash to start or grow your emergency fund. Experts suggest socking away between three and six months’ worth of living expenses in a savings account. Just be sure to practice due diligence before opening an account: Look for banks with high-interest savings accounts and no monthly fees or minimum balances.
Open a 529 College Savings Plan
It should come as no surprise that college is expensive. In fact, the average sticker price for tuition and fees at private, out-of-state public, and in-state public colleges are $35,087, $21,184, and $9,687, respectively, according to US News & World Report. Multiplied over four years and across multiple children, the prospect of paying for college can be overwhelming. And that’s not even getting into advanced degrees like law and medicine.
The good news? If your children are young, you’ve got plenty of time for the contributions you make to compound and grow. Have your children already flown the nest? According to MarketWatch, the best family members for creating college-savings plans aren’t parents, but grandparents. We can’t think of a better investment than in your family’s future.
Not only does opening a 529 college savings plan allow money to grow tax-free, but withdrawals aren’t taxed either as long as they’re used for qualified expenses, which include tuition, room, and board. You may even be eligible for a tax deduction or credit from your state, if it has its own plan.
Support Small Businesses
What if you’re among the lucky few who have all of the above covered? In this case, a splurge or two may be in order. If you’re inclined to spend your stimulus check or other disposable income, it’s possible to do good for others in the process, too — and there’s never been a better time to do so than right now when many small and local businesses are suffering due to the pandemic.
In addition to treating yourself, you’re also keeping your money within your own community when you shop small and local. This has short- and long-term benefits, such as job creation, improved infrastructure, and a higher quality of life for community members.
While “extra” money is exciting, it can also be “easy come, easy go.” Conversely, taking the time to spend it strategically by embracing one or more of these six strategies can lead to powerful payoffs over time.