Ten thousand dollars is a lot of money but certainly not enough to make you independently wealthy. I remember watching the California lottery television show when I lived in Sacramento. The lottery ticket scratcher winners were chosen randomly to be on the show. Then a few lucky people were pulled from the audience and got a chance to spin a wheel so a ping pong ball would determine whether they won a million dollars all the way down to a minimum $10,000. Most people actually won $10,000 but every single one of them had high hopes of winning the million.
Winning a million could be a life changer but $10,000 is nothing to shake a stick at – it can be a huge life “enhancer.” If you have $10,000, whether from your lottery winnings, a year-end bonus, a gift or from savings, here are some ideas on how to decide what to do with it.
Bump up your emergency fund. The rule of thumb is to have a minimum of three to six months of expenses in a liquid account. The emergency fund is a basic building block of financial security because it helps prevent people from going into debt when an unexpected job loss or emergency arises. Even though liquid accounts don’t pay much interest, the security of knowing the funds are there when needed is priceless.
Pay off debt. If you have high interest rate debt, pay it off with your windfall. The average credit card balance in the US (for those that carry debt) is about $16,000 and the average rate is 12.78%. If you paid $200 a month toward the balance, it would not be paid off for over 15 years. But plopping $10,000 down on the debt pays it off in just over three years. Being debt free in three years versus fifteen years is life changing.
If you have low interest rate loans such as a student loan at 6.8%, a car payment of 4% or a home equity line of credit at 3.5%, it makes more sense to invest the funds than pay off debt. At 12.78%, yes, but not 3.5%. What is high interest rate debt? Any debt over 7.5% makes sense to pay off because it would be difficult to earn that consistently in an investment.
Invest in a Roth IRA (or two.) Where else can you get tax-free earnings? Not too many places. The big advantage of a Roth IRA is the earnings can be withdrawn free of federal and state income taxes after age 59 ½ as long as the account has been for at least 5 years. There aren’t too many investments that provide tax-free growth! You can contribute up to $5,000 a year in the Roth ($6,000 if you are over 50) if you qualify income-wise. (Click here to review.) Since you have $10,000, invest in one this year and one for next year or if you are married, invest in one for each of you. A Roth investment today of $10,000 earning 8% for 20 years would grow to over $46,000, which could be withdrawn tax-free after five years and attaining age 59 ½. Not bad!
Buy a home or save for a down payment on a home. Lenders typically require home buyers to put 20% down when applying for a mortgage. Otherwise, you have to pay private mortgage insurance – which is such a waste of money! PMI doesn’t benefit the buyer at all – it only benefits the lender if the buyer ends up defaulting on the loan. Use your $10,000 toward a down payment on a home or an investment property. With interest rates at an all time low and home prices starting to come up, this may be a great time for a real estate investment.
Invest in yourself. The best income producing asset available is usually the last thing you think of – yourself! If you have always wanted to get your college degree or beef up your technical skills in areas that could increase your income, go back to school or take classes that will help you to get a promotion or a bonus. If you have a hobby such as collecting baseball cards, invest in turning your hobby into a business. Open an eBay account for your collectibles and attend Comic-Con next year. Think of these funds as seed capital to give you a start.
The lottery winners might have been disappointed to “only” get $10,000 when they compared it to a million dollars but actually $10,000 can make a huge difference in their lives. They can achieve peace of mind with extra funds in a savings account or have debt paid off sooner. They can also make this work for a better future, whether its investing for retirement, in a house or in themselves.