Borrowing money

If you have $1,000 in the bank, here are 5 smart money moves

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Whether it’s giving you a safety net or saving money for future expenses, your future self will thank you for taking these steps today.

Key points

  • Put every dollar to use, whether it’s building an emergency fund, saving for retirement, or paying off debt.
  • Having an adequate emergency fund is a great place to start with your extra money.
  • Consider the taxation of a retirement plan when deciding which account to fill out first.

1. Build an emergency fund

By having an emergency fund, you can save yourself the headache of liquidating other savings should the worst happen. An emergency fund should be used for unforeseen emergencies like job loss, car or appliance repairs, or medical bills.

Experts recommend having an emergency fund equal to between three and six months of non-discretionary spending, which can amount to thousands of dollars. Use your big bonus to start, build or fill your emergency fund.

2. Contribute to an HSA

As one of the few triple tax benefit savings accounts available, contributing to a health savings account is a smart way to prepare for future expenses in a tax-efficient way. The first tax advantage of an HSA is that the contributions are tax deductible, regardless of your income. In addition, investment income in an HSA increases tax-deferred. Finally, if used for an eligible medical expense, withdrawals are not taxable income.

It almost always makes sense to contribute to an HSA, but first you need to be eligible. Only people covered by a high-deductible health plan can open an HSA. Not sure if this applies to you? Ask your supplier.

3. Complete a 401(k) contribution

No, you cannot directly deposit this additional amount into your 401(k). 401(k) contributions are deferred from your income and are therefore tax efficient. However, you can still use your windfall to increase your contribution.

You can increase your 401(k) contribution by $1,000 and replace that lost income with the $1,000 in your pocket. This strategy works even better if you haven’t maxed out your employer, which could double your savings!

4. Boost your IRA

An extra $1,000 can get you closer to your maximum Roth or Traditional IRA for the year. Due to the tax-advantaged nature of IRA accounts, saving for retirement using one is a good option. The contribution limit for a Roth or traditional IRA in 2022 is $6,000, or $7,000 if you’re over 50.

5. Pay off consumer debt

Whether you have credit card debt, household loans, car loans or more, no one likes consumer debt. In addition to the feeling it gives you in the pit of your stomach, consumer debt usually carries a high interest rate. Why not use your bonus cash to pay off costly debts ahead of time and potentially save on future interest payments?

Read more: Our best debt repayment apps for 2022

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