With the holiday season finally behind us and the year of 2012 dead ahead, a reader asked me, “Stewart, What would you suggest I do with a $1,000?” You may have year-end bonus money, be expecting a tax refund or simply just have a few bucks burning a hole in your pocket. To get a broad spectrum of answers, I turned to my associates for their suggestions and just to make it fun, I offered to buy lunch for anyone whose idea I used. Here are their responses:
- Invest in a 529 college savings plan. This is my vote if you plan to help a child or grandchild pay for college. Your investment grows tax deferred and withdrawals for qualified education expenses are tax free…and you control the money the entire time. Yep, I’ll buy my own lunch!
- Update your wardrobe. Beth suggested updating your professional wardrobe keeping in mind to ‘Dress for the job you want, not the one you have’. She also suggested taking a course that will help advance your current career or help you get that job you want.
- Get in shape. Beth, Hugh and Michael all opted for investing in better health by hiring a personal trainer and joining a gym. Medical research indicates that even being moderately overweight is a leading cause of many health problems and health problems are a leading cause of financial problems!
- Add to your emergency fund. Melissa and Michael both thought it is important to build emergency reserves in what continues to be a shaky economy. You’ll want to keep this money safe by investing in a money market account, credit union savings account or short-term CDs even though you’ll earn near-zero interest.
- Help a charity. If there’s a charity you are passionate about, Melissa suggested not waiting until the end of the year to give, rather, “Do it now!” It’ll be your first tax deduction for the New Year!
- Invest in a Roth IRA. Hugh, Michael and Woodard all liked the idea of investing in a Roth IRA if you qualify (couples filing jointly with modified adjusted gross income in excess of $179,000 for 2011; $183,000 for 2012 and single filers with MAGI of $122,000 for 2011; $125,000 for 2012 are not eligible for a Roth IRA contribution). Michael points out that, “You never have to pay taxes!” Woodard adds a twist suggesting that if you have a young child with earned income, consider contributing to a Roth IRA for him or her. A $,1000 contribution today for a 19-year-old earning an average of 8% would be worth over $50,000 at his or her age 70…a nice start to retirement!
- Capture a tax credit. Kimberly reminded us that joint filers with incomes less than $56,500 (single filers with less than $28,250) may be eligible for a 2011 tax credit of up to $2,000 ($1,000 for single filers) for contributions to your IRA, Roth IRA, 401k, and certain other retirement plans. It’s called the Savers Credit.
- Pay down a credit card. Hugh and Woodard both recommended paying down on credit card debt. In this low interest rate environment, paying down a high interest credit card balance represents an equally high return on your investment. They suggest applying all the money on the card with the highest interest rate.
- Make an extra mortgage payment. Ramona would like to make an extra mortgage payment. If you can find a way to do this every year, you’ll cut years off your mortgage schedule and save thousands in interest payments.
- Pay down your student loans. Kelly says she uses any extra money to reduce student loans. Even though the interest rate might be relatively low, the psychological benefits are great!
- Save for your daughter’s wedding. Wedding expenses were on Wendy’s mind since her daughter’s engaged to a soon-to-be Navy Seal. Most people don’t plan for wedding expenses and even a modest wedding can put a serious dent in your future finances.
- Create a lasting memory. Melissa suggested you could do something you’ve never done before like take a balloon ride!
Use these suggestions to get your own creative juices flowing and make a decision what to do with your ‘found’ money. If you don’t make a conscious decision, you will likely find that it ‘vanished’ over the next several weeks or months.