Q&A: I Have $X, What Should I Do With It?

By on February 1, 2013

question Do you have some extra money in your bank account but no idea what to do with it? No matter if you saved the money over the course of several years, received a bonus at work, or received the cash in the form of a gift, it is yours now. With this in mind, what you do next is your decision.

While some people see dollar signs and wonder what they can buy, others realize that they should “play it smart.”

There is no “right or wrong” answer as to what you should do with this extra money. That being said, some decisions are smarter than others. Along with this, the answer is often times dictated by the actual amount. After all, there is a big difference between having $5,000 and $100,000.

For now, let’s take a closer look at four “dollar ranges” along with some ideas of what you can do with your money:

$0-$5,000: Save for short term needs

With this amount of money, you should consider saving for short term needs. For example, do you have an emergency, or “rainy day” fund? If not, there is no better time than now to start one. You never know when an unexpected situation will arrive – from a medical bill to a car repair – for which you will need quick cash. Ideally, having 6-12 months of expenses saved and readily available in a high interest savings account will make your life a lot easier should an unexpected life event ever arise.

(Learn more about why you need an emergency fund)

Another option you may want to consider (if you already have your emergency fund) is funding your IRA (or equivalent retirement fund like RRSP for Canadians). Since there are limits on how much you can contribute each year, make sure you know where you currently stand before depositing additional funds. This may not be the most exciting choice right now, but later in life you won’t regret it. Ever heard of compound interest?  Starting early will help you take advantage of compound interest and give you a better chance of retiring rich one day if you start early.

$5,000 to $25,000

With this much money, your intermediate term goals are a consideration. Are you saving up for a car or down payment on a house? If you are, you’ll want to look at short term investments. If not, you can look into some longer term investing strategies that have the potential to grow over the long run. It’s time to set up an investment account and learn about investing.

Since the ideal decision you make will depend on your financial goals, I would recommend joining an active community that will help you learn what’s best for you. Two such communities are Reddits r/personalfinance (or r/personalfinancecanada for Canadians).

If you fall in the category of people who would like to invest long term without “actively” trading, you might want to learn more about couch potato investing.

$25,000 to $100,000

If you have this much money and you aren’t planning for the long-term, you’re doing it wrong. You don’t need to rush, by any means, but it’s time you started to consider your options and make a decision on what to invest it in that suits your needs.

If you don’t know where to start, and would rather not learn, you might consider hiring a fee-based financial adviser. Before doing so, you should learn more about the fees associated with this arrangement as well as research the reputation of any adviser you consider using. The last thing you want to do is put the wrong person in charge of your money.

This is also a good time to think about saving for retirement (you do want to retire, don’t you?)

$100,000+

Now, we’re talking about a decent chunk of change. If you find yourself with this much money sitting around, your financial situation could change forever – if you make the right moves.

Although equities are always an option, with this much money you can likely branch out into other types of investments. Have you ever considered buying real estate as an investment, for example? What about a small business? It takes the right type of person to consider these options, but it is an idea that should definitely cross your mind.

Final Word

There is no denying that you have many options, and it can be confusing. From saving your cash in an emergency fund to funding an IRA to buying stocks and real estate. The key is to write down what your goals are first, learn which strategies are out there that suit those goals, and make decision from there.

Here are a few good books to help you get started on the path of learning:

  1. I Will Teach you To Be Rich
  2. The Bogleheads Guide To Investing

Photo Credit: Reem eng

Chris Bibey

About Chris Bibey

Chris Bibey is a freelance writer based in Pittsburgh, PA. With more than seven years of industry experience, he has published two books and has hundreds of articles in print and online. Follow Chris on Twitter or Google+.

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