Saving $10,000 is a wonderful accomplishment but it's critical to put that hard-earned cash to good use. With $10,000 in savings, there are many things you could do, but here are five safe and wise ways to allocate your cash.

Key Takeaways

  • Using $10,000 in savings to invest or pay down debt is a financially savvy decision. 
  • A few of the best investment options include increasing your 401(k) contribution and opening an IRA or 529. 
  • Using your savings to make additional payments on your mortgage may make financial sense. 
  • In many cases, paying down high-interest debt should be the highest priority, as the rate charged is usually higher than any return you’ll generate from investing.

What Would You Do With $10,000?

Boost 401(k) Savings

Using $10,000 in savings to increase your 401(k) savings is a great idea, especially if your employer matches contributions. Say your employer matches your contributions up to 5% of your pay, but you're currently only contributing 3%. In that case, you're essentially forfeiting 2% of your monthly salary. Consider increasing your contributions to the company match level. The 2021 contribution limit on 401(k) plans is $19,500—the catch-up contribution those 50 and over can add is $6,500, for a total of $25,000. 

The benefits—returns, tax deductions, or otherwise—you’ll get from investing or paying debt generally outweigh the return offered from savings accounts, although the decision must be balanced with the benefits of financial security. 

Open an Individual Retirement Account (IRA)

There are two options for individual retirement accounts (IRAs)—traditional and Roth. The main difference is the tax treatment of contributions and withdrawals. With a traditional IRA, you can write off contributions on your taxes each year, but your withdrawals are taxed during retirement.

With a Roth IRA, you contribute after-tax dollars but pay no taxes on withdrawals. Make sure you check out the Internal Revenue Service (IRS) website for a full list of restrictions, penalties, and other terms. For 2021, the contribution limit is the same as it was for 2020 for both IRAs—$6,000, or $7,000 for those 50 and older.

Start a College Fund 

You may also want to take your nest egg and invest it in your child's college fund. Your best bet is a 529 plan. The cost of college continues to rise, and anything you can do to help pay for these expenses can help your children decrease their reliance on student loans. 529 contributions are not deductible on federal taxes, but depending on where you live, they might be deductible on your state income tax return. Gains on money invested in 529 plans are tax-free, as are withdrawals when used for college or educational purposes. 

You can use money from your 529 plan to pay for your child's annual tuition up to $10,000 each year at a public, private, or religious school for K to 12 education. As of June 2021, 529 plans can also be used to pay for the costs of a beneficiary's apprenticeship program, as well as a lifetime maximum of $10,000 to pay down a qualified education loan.

One of the key benefits of investing more of your money in your 401(k), IRA, or in a 529 is that you’re effectively investing in the stock market. While it is riskier than your checking or savings account, you can expect to get a much better return on investment (ROI) over time. From 1926 through 2020, the average annual return of the S&P 500 was around 12% (not adjusted for inflation), which easily tops most savings accounts. 

Increase Your Mortgage Payments

Say you're 10 years into a $200,000, 30-year fixed mortgage at 6%. Increasing your monthly payment by just $100 could save nearly $19,000 over the life of the loan, and you'll pay off your mortgage almost three years earlier. In many cases, the rate on your mortgage, with the current average 30-year fixed mortgage rate being around 3%, is higher than savings account rates.

Pay Down Debt

Using some of your $10,000 in savings to pay off high-interest credit card or other loan debt is usually the best first step. That’s because the high-interest rates charged on most credit cards and consumer loans mean you’re effectively losing money. That is, the money you’d make investing that $10,000 in savings into an investment account or savings account would be less than the interest charged on your debt. Putting extra money toward paying down high-interest debt is financially savvy, assuming you have your emergency fund funded. 

The Bottom Line

Now that you've worked hard to save $10,000, it's time to get your money working for you. Research all fees and expenses that may come with any investment you choose, as some fees can really take a chunk out of your investment over the long-term—you don't want your investment efforts to have an adverse effect on your savings.