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If you were under 30 and had $500 to spend, what should you do with it in this economy?

By Brett Danko, CFP®

Congratulations on your $500 windfall!  You have several options . . .

1. Treat your friends to a night on the town
2. Buy that new electronic gadget or that perfect outfit that you’ve been eyeing
3. Evaluate your current financial status and make your money work for you
   

If you chose A or B, you are in the majority among young professionals.  If you chose option C, you are a bit more fiscally responsible than your peers.  Whatever your choice, you can benefit from the information below.

You may NOT think that $500 will go a long way toward improving your financial situation.  But consider this:

• Get current with your monthly bills
  (utilities, rent, minimum credit card payments, loans, etc.).  Late payments can negatively impact your credit rating, which can really hurt you when you try to rent an apartment or buy a house or a car.


• Pay down your highest interest rate credit card.
  On a standard 19.8% interest rate card, this saves you $100 in interest per year.


• Save it for a short-term goal:
  Put it into a separate savings account or bank CD.  If you leave it in your checking account, you will spend it.  Even though interest rates are very low, you want to have all the principle if you’re saving for a major upcoming expense such as a wedding or home purchase.


• Save it for the long-term:
  Start a Roth IRA (Individual Retirement Account) and invest the money in a stock index fund like the S&P 500.  Given the stock market’s historical return of 10% per year, on average since 1926, your $500 will grow to $14,463 in 40 years thanks to the magic of compounding interest.  What’s more, it will be distributed free of federal income tax!

What about paying down your student loan or car loan you ask?  
You could do that, but, the interest rates on these loans are typically low and in the case of student loans, the interest is tax deductible.  If you are current with you bills and have no credit card debt, the Roth IRA is a great choice.  Typically, you can’t touch the money in an IRA until you are 59½ years old, but there are many exceptions such as withdrawing for the purchase of your first home.

You say you have no debt and already save for retirement.  I say chose option A from the survey above or whatever will make you happiest.

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