If $10K were to show up suddenly in your bank account, what would you do? You could buy a new car or an expensive trip abroad, or maybe you’re generous and would buy all your friends and family brand new iPhones. But take a moment to consider what that money could mean for your future and the financial security of you and your loved ones.
If you were to save or invest that money with a specific goal in mind, it could potentially change your life for the better. But what’s the best investment you can make with that $10K to realize the maximum benefit? Well, there are several factors to consider. For instance, whether the windfall was a one-off or recurring, your short-term and long-term financial goals, and your tolerance for risk.
How Often Will This Windfall Event Occur?
First, it’s important to know if this extra money is just a one-time windfall — such as an inheritance or a gift — or whether you might expect a bit of extra cash on a semi-regular basis, such as in the case of an annual bonus. The frequency of such a large cash injection can help you determine how best to invest the money to ensure that you prosper from your decision in the future.
If you know this $10K is a once in a lifetime event, you’ll need to be especially thoughtful with how you decide to incorporate it into your overall financial strategy. If this is the case, you should apply the money to your highest priority financial goal to ensure it will make a meaningful difference in your financial needs.
For instance, maybe you need to fully fund your emergency fund, or you want to start saving for your child’s college education. Or perhaps you’ve been saving for a home and that $10K will drastically speed up your timeline for meeting that goal. Alternatively, perhaps you know you’re a bit behind when it comes to retirement savings and you decide to put that $10K into your IRA or 401(k).
On the other hand, if this is a repeatable event like an annual, predictable bonus, you can be a bit more flexible in how you decide to save or invest the funds toward your needs, goals, or even wants.
With the knowledge you’re predictably receiving a $10K bonus or extra income, you can spread your savings around different goals, as you can add more to these goals over time. As such, you can be a bit more aggressive in your investment strategies, maybe opting to invest in stocks and bonds rather than placing the entire lump sum in an FDIC-insured savings account. After all, if you know that cash will be coming in, you can add it to your savings if necessary to make up for any market downturns.
Evaluate Your Goals to Determine How to Invest 10K
Once you’ve determined how often you can expect an extra $10K to fall into your lap, you’ll need to evaluate your financial goals. Are these goals short or long-term? The time horizon will impact how and where you should save or invest that money to achieve the maximum benefit.
For instance, if you know you’ll need the money in within one to three years, you’ll need to make sure it’s safe and that it’s easily accessible. As such, high interest savings accounts, Certificates of Deposit (CDs), and money market funds would be your best options. On the other hand, if you know you won’t need the money for at least three to five years, you can tolerate some ups and downs and might consider placing your money in stocks and bonds via a low-cost diversified mutual fund.
Below we’ll review some common short-term and long-term goals, and provide suggestions on how to invest 10K based on your specific goal.
How to Invest 10K in Short-Term Financial Goals
Short-term financial goals are generally those that you want to achieve within three to five years. As a general rule of thumb, if you’re saving your $10K with one of these goals in mind, you should invest the cash in an interest-bearing savings account or a money market account.
These types of accounts are a wiser choice than your run-of-the-mill checking account, as your money can grow risk-free but still make money back for you. Usually, these types of accounts offer much higher rates of interest than a checking account — anywhere between 2.00% to 3.00% compared to the average 0.01% of checking accounts.
That means that if you were to invest $10K into a high interest savings or money market account, by the time you withdrew the money three to five years later, you could’ve earned an additional $600 to $1,500 in interest. That’s a much better rate of return than you would see with the average checking account, which would likely only earn you $3-$5 over the same period of time.
Where to save: High-interest savings account or money market account
According to most personal finance experts, the first short-term goal you should check off your list with that $10K is an emergency fund, if you haven’t already. This particular savings fund is intended to cover anywhere between three to six months’ worth of living expenses in the unlikely event of a life emergency. Perhaps you lose your job, or a family member suffers a serious medical emergency — you need to have the funds available to cover expenses should such a catastrophe occur in order to avoid incurring high interest debt that could seriously handicap your financial health.
For instance, if you know that your monthly costs — including things like rent or mortgage payments, insurance, and groceries — are around $2,500, you should save at a minimum between $7,500 and $15,000. That $10K could help you make some serious progress toward this goal.
Rainy Day Fund
Where to save: High-interest savings account or money market account
In contrast to an emergency fund, a rainy day fund is intended for shorter-term, one-off expenses. For instance, this fund is intended to cover things like:
- Repairs or maintenance on your house or car
- Medical or dental expenses
- Travel and vacation expenses
Usually a fund of around $1,000 is enough to cover these types of expenses for most. As such, you could easily invest $10K to tick this fund off your list of financial goals.
Pay Down Debt
Where to save: Pay off high-interest debt, place a small portion in a high-interest savings account
Paying down high interest debt should be next on your list of financial goals once you’ve managed to fully fund your emergency and rainy day funds. That means any debt with an interest rate over 5.50%, and could include credit card debt, student loan debt, or even auto loans with high interest rates. This should be an especially high priority if you’ve only been making small payments toward chipping away at this debt.
Your $10K could give you an amazing boost toward financial security if you find yourself owing quite a lot in high interest debt. For example, the average credit card interest rate as of November 2018 was a whopping 16.86% according to the St. Louis Federal Reserve. This rate would be hard to match with any earnings on investments so the smart thing to do would be to apply your $10,000 to pay down debt.
While it’s crucial for your long-term financial health to pay off any high interest debt as soon as possible, you should also evaluate how you came to be in debt in the first place — especially if it’s credit card and other consumer debt.
If you can be honest with yourself about your debt situation and you haven’t yet started the habit of saving, consider reserving a small portion of this $10K to start a savings account. This might sound contrary to first paying down the high-interest rate debt. But, developing a savings habit has its own value, and can help you avoid getting into debt again by inspiring you to focus on your future instead of just paying off what’s in your past.
To help you stick to a newfound savings habit, think about automating a monthly deposit to your new savings account. Watching your savings grow bit by bit might be just the motivation you need not to get into consumer debt again.
House Down Payment
Where to save: High-interest savings account, Certificate of Deposit (CD), or money market account
Finally, you might find yourself financially stable enough to start thinking about owning your own home. If that’s the case, it’s a great idea to invest $10K to start a house-savings fund for a down payment on your future new home. Generally, it’s best to have at least 20% of the home’s value as a down payment, so that $10K could see you walking into your new house months or years sooner than you had originally planned.
How to Invest 10K in Long-Term Financial Goals
When you don’t expect to achieve a certain financial goal for more than five years, most financial advisors would consider this a long-term goal. As such, you can take a bit more risk when you invest your $10K. With time on your side, you can look towards investing in a diversified portfolio of stocks, bonds, and other investments.
Where to invest: 529 plans
If you’re a new parent — or even a not-so-new parent — that $10K could have a significant impact on any college education savings fund you have for your child. If your goal is to finance your son or daughter’s primary, secondary, or college education, a 529 plan might be the best place to invest your money.
529 plans are tax-advantaged accounts intended to help parents help their children achieve an education by allowing invested funds to grow tax-free, as well as be withdrawn tax-free as long as the funds are used for qualified education expenses. This special type of investment account can be used for primary or secondary education to pay education-related costs of up to $10,000 per student per year. Qualified expenses include things like tuition, fees, books, and living expenses.
One simple way to invest for education savings is to look for a 529 education savings plan with a “target date” that will shift your investments in a diversified portfolio over time. You can also find investments that are classified by risk tolerance, i.e., how you react when faced with the uncertainty of loss.
If you’re not too risk averse and looking at a longer time horizon of seven years or more, you might consider picking 529 plans that invest more heavily in stocks — as opposed to bonds — for a potentially higher return on your investment. However, you’ll also have to be able to cope with a greater risk of losing the money in the case of a market crash.
On the other hand, if you’ll need the money for you or your child’s education between three and seven years from now, a better, low-risk investment option would be to look for plans with a more conservative asset allocation that blend stocks with fixed income assets like bonds, as these earn more predictable returns over time than stocks.
Where to invest: 401(k), IRA
The next long-term goal should — at some point — make it to every individual’s financial to-do list: retirement planning. Whether you’re on track or behind, investing an additional $10K in your retirement accounts is a worthy endeavor. And due to the power of compounding interest — where your investments generate earnings of their own — the sooner you can start, the better.
The most common retirement accounts are 401(k)s and Individual Retirement Accounts (IRAs). Both types of accounts are tax-advantaged, allowing any investment you make to grow tax-free, which can result in thousands — if not tens of thousands — of additional earnings over the course of the investment period.
But if you have multiple retirement accounts, where should you put that $10K?
If you have a 401(k) with a company match, you should put enough of your $10K into the account to capture your employer’s contribution. Not only is it essentially free money, but you’ll realize an immediate 100% return on any investment.
However, if you’ve already captured your employer match, you could use your $10K to max out either a traditional or Roth IRA, as the annual contribution limits are set at only $6,000 for the 2019 tax year (add another $1,000 if you’re 50 or over). Then, if retirement saving is still your number one goal, you could allocate anything leftover back to your employer 401(k).
Where to invest: Taxable brokerage account
If you’re on track with your other financial goals, it might be a good time to start investing to build wealth by investing in the stock market. When it comes to this long-term goal, there are plenty of ways to start investing available to you — ranging from stocks and bonds to real estate and even bitcoin.
In general, if you’re looking to embark on an investing strategy to meet long-term or intermediate goals that aren’t retirement, one of the best options is to open a taxable brokerage account or a mutual fund account with a reputable financial institution, such as Vanguard or Fidelity.
However, before you decide what type of assets to invest in with your $10K, there are a few things you should be mindful of. First and foremost, you should not overpay. The last thing you want is for your $10K to be eaten away at by management fees, like high expense ratios, commissions, loads, or trailing fees, where additional charges accumulate over the years. It’s wise to shop around for diversified investment funds that not only have a long track record of investment management and service, but also offer either no-cost or low fees, such as low-cost index funds and exchange traded funds.
While deciding how to invest 10K will depend on your short and long-term financial goals, it’s important to keep things in perspective. What you do with this one-time lump sum of cash is important, but there are broader, more routine money behaviors that will determine the overall caliber of your financial health.
As the old proverb that goes, “The art is not in making money, but in keeping it.” This is true whether you have $10, $100, or $10,000. Treating both large and small amounts — as well as both windfalls and hard-earned income — with equal care will serve your finances well over time. In fact, saving small amounts here and there is just as important — if not more important — than saving and investing a large amount only once.
After all, when small amounts are invested wisely, over time they will grow into large amounts. Even if you don’t ever have the luxury of deciding what to do with $10K all at once, being careful with all the money that passes through your care will build wise habits.