- Samantha Lee/Business Insider
What do you do with that extra generous birthday check or unexpected raise?
It can be tempting to splurge on a new iPhone or extravagant vacation, but excessive spending may not be the most productive way to handle an extra $1,000 or so.
Before blowing your check on gifts, trips, or gadgets, consider directing it towards these seven options:
Start, or contribute more to, an emergency fund
“If you do come into some money, the first thing you need to do is make sure you have an emergency reserve,” Kathleen Grace, certified financial planner and author of “Prince Not So Charming: A Romantic Tale of Financial Independence,” tells Business Insider.
Unsure where to put it? A high-yield savings account is a possibility, or you could try a short-term bond fund or money market fund.
Pay off lingering debt
If you have debt – whether it’s student loans, car loans, or credit card debt – a bonus or birthday check can be a great way to start tackling it.
Attack what Grace calls the “expensive debt” first – the high-interest debt like credit card debt, as interest can end up costing you thousands of dollars in the long run.
Put it to work
If you’re debt-free and have a sound emergency fund, put any extra cash to work so it will compound and turn into more over time.
The simplest starting point is to invest in your employer’s 401(k) plan if possible – and make sure to take full advantage of your company’s 401(k) match if they offer one.
Next, consider contributing money towards a Roth IRA or traditional IRA, individual retirement accounts with different tax structures. If you still have money left over, you can research low-cost index funds, which Warren Buffett recommends, and look into the online investment platforms known as “robo-advisers,” which manage your investments for you through unique algorithms.
- Flickr/Moyan Brenn
Set it aside for big purchases
There are bound to be big expenses in your future – a home, car, vacation, and kids, to name a few – that require diligent savings.
The best way to prepare for these expenses is to create savings goals, and then set aside money as early as possible. Use your extra cash to jump start these savings goals, or add to previously established ones.
Tap into work benefits
Find out what benefits your employer offers and consider contributing money to these three accounts that offer tax advantages:
Healthcare flexible-spending account (FSA): This type of account is a pretax benefit account you can use to cover a variety of healthcare products and services, from acupuncture and physical therapy to vaccines and over-the-counter medicine. By paying for these services with pre-tax money, you can save about 30% on healthcare expenses, WageWorks reports.
Dependent-care flexible-spending account: If you have young children, dependent-care FSAs are worth considering. This account works similarly to the healthcare FSA, in that you can contribute pretax money, but is specific for dependent-care services, such as preschool, summer camp, daycare, or before- and after-school programs.
Health savings account (HSA): With an HSA, you can contribute pre-tax money and use towards medical costs whenever you want, not just during the plan year.
To qualify for a HSA, the IRS requires you to be on a high-deductible health care plan (HDHP) – a plan that offers a lower health insurance premium and a high deductible. This option is particularly advantageous for those who are generally healthy and don’t have to go to the doctor’s office or hospital that often, such as 20- or 30-somes without children who are looking to save for future health care expenses.
While you can use it to pay for qualifying healthcare expenses today, you can also use it as a complementary tool for retirement planning, as the funds will always be available for you to use.
It’s important to spend responsibly, but it’s equally important to reward yourself every once in a while, Grace says: “Budgeting is kind of like dieting. If I tell myself I can’t have something over and over, I want it more and more, so I think it’s really important to treat yourself – maybe you take $50 or $100 and spend it however you’d like as a reward for paying down some high-interest debt or building your emergency reserve.”
Treat yourself to a massage, dinner at a nice restaurant, or that watch you’ve been eyeing – just don’t go overboard.
Donate to a charity
“Donate to a cause that’s near and dear to your heart,” encourages Grace. Even a small amount can be meaningful, she encourages: “Unfortunately, in our society, we sometimes feel ashamed if we can’t write a big check. We think we’re not important to the charity if we can’t cut a substantial check – and that’s on the contrary.”