Whether you’ve saved $10,000 or came into it another way, you may want to look at the best way to invest it for your future. This is a great amount to start with and there are many options of what can be done with it. Before deciding on one, consider the options below and what may be best for you. You never know what will happen and having a plan for money is the best thing you can do for you and your family’s future.
1. Build or Contribute to a Cash Emergency Fund
Things can change so easily in life and it’s impossible to know what is going to come your way. Emergencies or large expenses may come up and you want to be as prepared as possible. Whether it be an unexpected hospital bill, loss of a job or demise of a large household appliance, it’s wise to have some money saved in order to not go into debt or at least be able to pay a majority of this expense. This will help you greatly to avoid accumulating interest as well on those bills.
If you’re single or married without children, it’s recommended that your emergency fund be between three and six months worth. If you have a family with children, it’s recommended to have between six and 12 months of cushion.
This first option of what to do with $10,000 is a great way to be prepared for unexpected circumstances. This is simply to save the money and start or contribute to your already-established emergency fund. $10,000 would be a great start to this and something that you can contribute to with each paycheck going forward as well. The only catch is that you must be strong and not touch this money until it is truly needed. You shouldn’t use it to buy extra during the month beyond your budget as that will defeat its purpose and run the money down. It’s also a good idea to put into a money market account or something that yields a little more interest. If you’re not planning on touching it anyway, this will get the most use out of saving this money.
This US News article has great tips for building this cushion. You want to evaluate where you’re spending money and form a budget so you know how much you can contribute to savings on a regular basis. While $10,000 is a great start, depending on your family situation you will probably want to continue to grow this number as well. Most likely, your expenses for six to 12 months will exceed this number anyway. Plus if you save a lot more money, you can look into additional options like the ones below if you decide at first that saving it is the best way to go.
2. Pay Off High-Interest Debt
If you have high-interest debt, you may want to look into paying it off even before the first option of saving the $10,000. Paying off this debt can only help you going forward because you won’t be paying the high interest attached to your debt. You are wasting a great deal of money paying into interest so if you can afford to pay off or pay down substantial debt, it’s a great idea to do so.
School loans and a house loan can be looked at later as they will probably be much higher than other debt that you have. Debt from these two items are often not looked upon as bad debt anyway because most people have them and they are investments in yourself and your future. Credit card debt on the other hand is not looked at in this much of a good light. This debt is worse to carry and has higher interest rates than those of school and house. The first debts that you’ll want to get rid of are credit cards and then any loans attached to merchandise such as a car or furniture financing.
US News also has a beneficial article on paying off debt that would be beneficial to look at for paying off current debt and how to go forward so you don’t get into so much debt again. Not only do you want to get rid of your current debt, but if you do carry that much debt, you’ll want to make sure you don’t get into that situation again in the future.
3. Contribute to an Employer 401k
Another great way to build toward your future and use this $10,000 is to plan for your retirement. Consider adding additional money into your 401K, especially if your employer has a matching program. Not only are you planning for your retirement, your employer is helping you by giving you free money to match your own contributions. Even if you’re young and many years away from retirement, now is the time to start saving money. The sooner you invest in your own retirement, the more money you’ll have when it comes time and the more comfortable you’ll be.
US News has advice on this as well. It is almost unheard of to be provided with a pension at this point. If you have one, you are one of the few lucky people. Most employers no longer provide pensions. Because of this, you need to take your future into your own hands and look out for yourself to provide for retirement instead of relying on others.
4. Contribute to a ROTH IRA
In addition to or in place of a 401K, you may want to look into an IRA. There are two different options, a Roth IRA and a traditional IRA. You will want to research both to decide which is the best one for you.
In order to open a ROTH IRA, you must have earned income through either a job or self-employment. Depending on your income and tax filing status, you may be restricted as to how much you can contribute. You need to be below the threshold. The limits for 2016 are $117,000-$133,000 for single and $184,000-$194,000 for married.
There are no age restrictions on who can contribute to a Roth IRA. You can be a teenager working a summer job or an individual over age 70.5. In a traditional IRA, you are unable to contribute if you’re over 70.5.
Another difference is that with a Roth IRA the contributions you make are with post-tax dollars. You pay taxes on the money before being able to add them to a Roth IRA so it doesn’t reduce your taxable income. The benefit of this is that when you retire, you won’t have to pay taxes on the money when you take it out because you already have. This will help you see the exact amount of money you have as you go along instead of having to wait for taxes to be taken out later.
5. Contribute to a Traditional IRA
To open a traditional IRA, you also need to have earned income. With a Traditional IRA, the money is taken pre-taxed so when you withdraw it you will need to pay taxes on it at that time. This will also lower your taxable income in the meantime, though, which may be helpful for lowering your tax bracket and reducing your yearly tax bill. Depending on your situation, this could be a great benefit and something you’ll want to look at more closely.
If you are over 70.5 years of age, you can no longer contribute to this kind of IRA. Chances are that you’ll probably be retired by this point anyway so it may not make that much of a difference.
6. Buy Life Insurance
Another great investment of your $10K is to purchase life insurance. Although this may not be a traditional “investment” that brings you returns, I still view it as a kind of investment in your family’s future. Life insurance can protect your family financially in case something should happen to you, which can a game changer for young families, in particular.
According to CCN, life insurance is most necessary when you’re younger and have young children. The purpose of life insurance is to provide for your children if you were to die prematurely. You want to make sure they’ll have the money to be educated and raised. Once they are grown, they won’t need this since they’ll be providing for themselves.
A reason you may need life insurance after your children are grown is if you haven’t adequately saved for retirement and your spouse is dependent on your income. If you have saved for retirement, that money should suffice to support them without life insurance. Depending on your situation, you may want to supplement your spouse’s retirement with this money.
7. Start a Business
With this $10,000 you can also use it to follow your dreams of starting your own business. You may have always wanted to start a business and this money is a good step toward that goal. Not only do you want to fulfill your dream, but you want it to be successful. It would be crushing to start this business and go into debt or fail miserably. Research your idea and make sure it makes sense for both being a lucrative investment and for it making sense in the area in which you live. There are many things to consider when starting your own business and it can be a very daunting task so you will want to prepare and do the adequate research. You want to make sure you know what you’re getting into.
Here is a set of steps to work through as you set up your business:
You want to put together a sound business plan to make sure you’ve fully thought out your idea and know what it will take to put your business together. You need to put together a description of your business, market analysis, the organization and management, service/product line, marketing and financial projections.
– Get business assistance and training
This link has a great amount of information in regards to starting a business. There are online courses to choose from to make sure you’re going into your idea with the best start possible. There are things that you may not have thought of and this provides great tips for moving forward.
– Choose a location for your business
You want to make sure you choose a location that’s not only affordable for you, but also brings in the customers that you’re looking for. You need to plan and research areas thoroughly in order to find the right one for you.
You already have the $10K, which is a great start! Check out the link above for research on loan programs for the additional money.
– Determine the legal structure of your business
You need to decide what form of business entity you want to establish as this will determine your income tax return.
You need to pick a name for your business and register it with your state government as well as obtain your tax identification number from the IRS.
– Register for state and local taxes
When you register with your state, you can obtain your tax identification number, disability, workers’ compensation and unemployment insurance.
You will want to research what licenses and permits are necessary to run your business.
– Understand employer responsibilities
There are legal steps to hire employees such as an employer identification number, setting up records for withholding taxes, setting up employee eligibility verification, registering with state’s new hire reporting program and obtaining workers’ compensation insurance.
8. Invest in Yourself
You could spend the money on yourself whether it be following another dream or simply taking art classes or something creative. You could use it toward furthering your education with a structured degree or just taking some fun classes such as martial arts or an art class.
9. Use the Cash Toward a Home Purchase
If you’re looking to buy a home, the $10,000 is a great start toward a down payment to be able to lessen your monthly payments. Often lenders like for you to put 20% down, but with only $10K for a down payment that isn’t realistic as you would be looking at a house for only $50,000, which isn’t likely what you want.
It isn’t necessary to have 20% to put down, you can get a house for as little as 3% down. This greatly expands the houses you can look at as with a $10K down payment, you’ll be able to look at houses up to about $333,000. Instead of going that high, you probably want to look at something more in the $250,000 range. Remember that you still need to pay it all back and that your monthly payments will be higher with a lower down payment.
If you already have a home and are interested in owning an investment property such as a duplex or other housing, this is a great step toward that as well.
There are many ways that you can invest in yourself with $10,000. Make sure to think them all through and that you pick the one that makes the most sense for you.