In this economy, $5,000 may feel like a lot more money than it did just a few years ago. There are numerous ways that you may find yourself with an extra $5,000: a bonus at work, inheritance, an extra contract job that you weren't expecting or a tax refund. Maybe you have it now or you're expecting it soon, but regardless of the time frame, what are you expecting to do with the money? Here are a few ideas that may help.
Pay off Credit Cards
If your household has credit card debt, you have, on average, $15,956 worth. Almost one third of that debt could be wiped out with that $5,000. If your credit card interest rate is average, you are paying 13% ,or $650 each year, to hold that balance. That $5,000 could reduce the interest you're building up by $54 a month. How long was it going to take you to save $5,000 for the sole purpose of paying your credit card debt? If it was two years, you just saved $1,300 making the return on your $5,000 - 26% over two years or 13% per year. Any investor would be very happy with that figure.
Although it's not necessarily fun, the best return you'll get on your money is to service your debt.
High Quality Stocks
Investing in high quality, dividend paying stocks for a long period of time has shown to be a very safe investment. Because it's nearly impossible to pick the few correct stocks that will perform better than the overall market, look at an index mutual fund or exchange traded fund (ETF) that tracks the total stock market.
Historic returns for the stock market over the past 50 years have averaged around 10%, making this a good investment, but not nearly as good as paying down debt.
The cost of a college education has risen 130% in the last 20 years, according to USA Today. If you have a two-year old child now, the cost to send your child to college in 16 years will be $95,000, if he or she chooses a college in the state where you are a resident. If your child chooses a private university, the cost rises to as high $340,000, if college inflation rates stay as they are for another 16 years.
The best way to save for college is to use a 529 plan. These tax advantaged college savings accounts are similar to 401(k) plans where you contribute a certain amount into the plan, the money is invested into funds of your choice and you withdraw those funds when the child reaches college age.
Some 529 plans allow you to purchase years of college at today's rates for use when the child reaches college age, but most plans now invest the money without guaranteeing future results. That same $5,000 is a great start to put in a plan like this, and although the returns will average less than the overall stock market, the plan is one of the best ways to save for future college expenses.
An ETF is a basket of investment products packaged into one fund. They often come with low fees, yet offer the safety of a diverse portfolio. Some of these ETFs hold bonds, which are historically safer than stocks. Some bond ETFs have dividends of 7% or more and, barring any large investment market event, those dividends are quite safe, because of the hundreds or even thousands of bonds held in these funds. If you choose to invest in Bond ETFs, you may need to ask for help from a trust financial adviser.
Start a Small Business
If your debts are paid, you don't have children or you're well on your way to having your kids' college education paid for, consider starting a small business. To get your business off of the ground, $5,000 may not go very far, but some service-type businesses have very little startup costs. Before committing the money to a small business, make sure to carefully weigh the time and financial commitment that will come with this type of endeavor.
Forecasting the annual return is nearly impossible due to the many variables that come with starting a business, but even more important, this might jump-start your dream of becoming an entrepreneur.
The Bottom Line
Even if it isn't $5,000, before deciding how to utilize a larger sum of money that found its way into your bank account, think more long term. Sure, you could purchase the big TV that you've wanted for a long time but is that the best decision to make for years to come?