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.
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 2019 contribution limit on 401k plans is $19,000—the catch-up contribution those 50 and over can add is $6,000, 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
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. The IRS website for a full list of restrictions, penalties, and other terms. For 2019, the contribution limit for both IRAs is $6,000, or $7,000 for those 50 and older.
- Using $10,000 in savings to invest or pay down debt are financially savvy decisions.
- A few of the best investment options include increasing your 401(k) contribution and opening an IRA or 529.
- There might be cases where using your savings to make additional payments on your mortgage makes financial sense.
- Paying down high-interest in many cases should be the highest priority, as the rate charged is usually higher than any return you’ll generate from investing.
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 lessen their reliance on student loans. 529 contributions 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.
One of the key benefits of investing more of your money in your 401(k), IRA, or 529 is that you’re effectively investing in the stock market. While it is considered riskier than your checking or savings account, you’ll get a much better return on investment (ROI). The long-term average annual return of the S&P 500 is 8%, which easily tops most savings accounts offer between 2% and 3% today.
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 4%, 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 always the first step. That’s because the high interest charged on most credit cards and consumer loans means 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.