Money magazine periodically has an issue where they discuss what to do with $1,000, $10,000, or $100,000. I’m always surprised by some of the suggestions, which include thing like this year’s entries, “Rent a muscle car for a day,” or “Take a yoga class.” There are some good articles on budgeting and investing, but there are also a lot of articles on spending money, often in foolish and frivolous ways. This month’s issue included an article on the best credit cards. No one who is wealthy ever got there by earning points on credit cards.
Growing wealth involves investing. It may be investing in starting a business (something most millionaires did to become wealthy), investing to learn skills to make a better living, or investing in stocks and bonds to make your money grow faster than you can through your own labor alone. Even the modest $1,000 can turn into a year’s worth of expenses when you retire if you invest it when you are first starting your working career. So what would I do with $1,000, $10,000, or $100,000 right now? Here are some suggestions.
What to do with $1,000.
- Put it in a money market fund and keep it as an emergency fund. The next time the car breaks down, you’ll have the cash ready, which means you won’t need to put it on a credit card and start paying out a portion of your earnings in interest..
- Pay down some credit card debt. This is like investing at 18%, meaning it is like saving $1000 every 3 years.
- Pay a couple of extra payments on the home. If you make just one extra payment on a 30 year mortgage a year, you’ll pay it off about 8 years early. With a $1,000 per month payment, that is a savings of about $74,000.
- Put it in a CD and then save up $1,000 to $3,000 more to invest in an index fund or shares of a young growth company. Make this a regular practice and you’re on the path to becoming wealthy.
- Pick a growth stock trading for under $20 (a young company with a lot of room to grow), buy 50 shares and forget you own it for a while.
What to do with $10,000.
- Pay off your credit cards. At 18% interest, you’ll be saving $10,000 every three years!
- Pay off your cars, or buy a couple of 5-6 year old used cars for $5000 each. Not having a car payment will allow you to pay cash for cars from now on if you save up the money you would have been putting towards payments, even after paying for repairs. That’s how wealthy people have money to pay cash for things.
- Fund your IRA and that of your spouse. Retirement may be a ways off but you’ll need a lot of money when you get there for necessities and medical bills.
- Start an educational IRA for your kids. If you’re hoping for your kids to go to college, you need to start saving early. You can put $2,000 per child into an educational IRA that is tax-free for educational expenses.
- Buy shares of a large cap and a small cap index fund or index ETF. Index funds have low costs, which will make a big difference over time. Buying two sectors of the market reduces volatility.
- Buy 100 shares each of 3-5 of your top stock picks. Add to these positions over time, gradually diversifying into more stocks and mutual funds as you get older and your portfolio grows.
What to do with $100,000.
- Pay off any remaining debts, except for maybe the house. Paying off debts increases the amount of money you have available since you are no longer losing money to interest. With rates as low as they are, keeping a home mortgage might make sense to have some money for investing, but there is also no other feeling like owning your home outright.
- Buy a set of index funds. Include large cap stocks, small cap stocks, real estate (through REITs), and income stocks. Consider international stocks as well. The younger you are the greater the proportion of growth you should have and the lower the portion of income funds. Bonds also belong in your portfolio, but they are to risky right now due to the low-interest rates.
- Buy 200-500 shares each in 5 stocks that are the best performing growth stocks in their industries. Keep these positions small enough that you can stand a loss should one of them fail outright.
Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.