Now and then we end up with some extra money in our hands. We can spend it in ways that will offer fleeting satisfaction or in ways that can benefit us for years to come. Here are four great uses for your extra dollars.
Build your emergency fund
I'm a huge proponent of emergency funds because I have had to rely on mine more than once in the recent past. Over the last five years alone, I've had to unexpectedly pay for a new roof, major car repairs, and surprise medical bills. In each case, my wife and I dipped into our emergency fund to pay for the expense and then immediately worked on replenishing it.
So how big should your emergency fund be? Most financial experts suggest that you should keep at least three times your monthly expenses in cash, but you should aim for a higher number if you have dependents. That $1,000 you have lying around certainly won't be enough to get you all the way there, but it could be a great starting point.
Treat high-interest debt like the emergency that it really is
Consider that the average interest rate on credit cards is 15.07%. The power of compound interest can turn a $1,000 debt today into a $4,000 debt a decade from now.
Chart by author.
While there might be a lot of things you'd like to spend your money on now, your future self will thank you for paying down this debt. Making the prudent move now will give you more freedom -- and cash flow -- in the years to come.
Saving diligently for retirement can prevent you from running out of money. Image source: Getty Images.
Increase your retirement contributions
To get an idea of what a difference $1,000 can make to your retirement, consider this example: Imagine that you contribute $10,000 annually, in total, to your IRA, your 401(k), or both, for 25 years. Let's say that it grows by an annual average of 8%. At the end of 25 years, you'll have just about $790,000. If you managed to sock away $11,000 per year over those 25 years, though, your end sum would top $868,000 -- significantly more. Specifically, you'd have about $79,000 more, just by having invested an additional $25,000 -- $1,000 per year.
Few of us are going to want to live on Social Security alone, and even fewer have pensions awaiting us in retirement. Thus, it's rather critical to sock away money for retirement. More and more people are living into their 90s -- you want to be able to afford to do that.
Get smart about healthcare costs
Many employers offer these plans to workers, and they're great because they allow you to pay for out-of-pocket healthcare costs with tax-free money. FSAs can be combined with any health insurance plan to cover dental work, co-pays, and other healthcare costs. You can contribute up to $2,550 to one this year.
HSAs have to be paired up with qualifying high-deductible health insurance plans. If your plan qualifies as one, then up to $3,400 (for individuals) or $6,750 (for families) can be stashed away in them.
In both cases, as long as the money is used for qualified medical costs, it won't be subject to federal income tax, and since a family of four could easily eclipse $1,000 in out-of-pocket costs annually, using these plans delivers an impressive return that's equivalent to your income tax rate.
However, there are some rules to remember about FSAs and HSAs. For example, money in an HSA can be rolled-over year after year, but money that's put in an FSA typically must be used in the year it's contributed. Therefore, make sure you don't put that extra $1,000 into an FSA unless you know you'll use it, or you'll risk losing it.
The tax benefits of FSAs and HSAs make them worth investigating, so chat with your human resources department about them soon!
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