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Saving $10,000 is a wonderful accomplishment, but it’s critical to put that hard-earned cash to good use. With $10,000 in savings, there are many things you could do. Here are five safe and wise ways to allocate your cash.
Key Takeaways
- In many cases, paying down high-interest debt should be your first priority, as the rate charged is usually higher than any return you’ll generate from investing.
- A few of the best investment options include increasing your 401(k) contribution and opening an individual retirement account (IRA) or a 529.Â
- Using your savings to make additional payments on your mortgage may also make financial sense.Â
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1. Pay Down High-Interest Debt
If you have high-interest credit card or other high-interest debt, you should probably use your $10,000 to pay it off. That’s because the high interest rates charged by most credit cards and consumer loans mean you’re effectively losing money. That is, the money you’d make investing that $10,000 would be less than the interest charged on your debt.
Putting extra money toward paying down high-interest debt is financially savvy, assuming you’ve started an emergency fund.Â
2. Max Out Your Employer Match for Your 401(k)
Once any high-interest debt is paid off, your next step is to contribute to your 401(k), especially if your employer matches contributions. At minimum, you should contribute enough to max out your employer match, experts say.
Say your employer matches your contributions up to 5% of your pay, but you’re currently only contributing 3%. In that case, you’re essentially forfeiting 2% of your monthly salary.
Of course, you can go further than your employer match. The 2024 contribution limit for 401(k) plans is $23,000 if you’re under 50 years old. The catch-up contribution those age 50 and older can add is $7,500, for a total of $30,500. (In 2023, the contribution limit for those under 50 was $22,500, plus the additional catch-up limit was $7,500.)
The benefits—returns, tax deductions, or otherwise—you’ll get from investing or paying debt generally outweigh the return offered from savings accounts, although the decision must be balanced with the benefits of financial security.
3. Contribute to an Individual Retirement Account (IRA)
After you’ve maxed out the employer match for your 401(k), you could contribute to an individual retirement account (IRA).
There are two options: traditional and Roth. The main difference is the tax treatment of contributions and withdrawals. You can write off contributions on your taxes each year with a traditional IRA, but your withdrawals are taxed during retirement.
With a Roth IRA, you contribute after-tax dollars but pay no taxes on withdrawals, as long as you’ve had the account for at least five years. Make sure you check out the Internal Revenue Service (IRS) website for a complete list of restrictions, penalties, and other terms. For 2024, the contribution limit is $7,000, or $8,000 if you’re age 50 or older. (For 2023, the contribution limit was $6,500, or $7,500 for those 50 or older.)
4. Contribute to a College Fund
If your retirement savings are fully funded this year, you may want to take your $10,000 and invest it in your child’s college fund. A solid choice is a 529 plan. The cost of college continues to rise, and anything you can do to help pay for these expenses can help your children decrease their reliance on student loans.
Notably, 529 contributions are not deductible on federal taxes, but they might be deductible on your state income tax return, depending on where you live. Â
You can use money from your 529 plan to pay for your child’s annual tuition up to $10,000 each year at a public, private, or religious school for K to 12 education. 529 plans can also be used to pay for the costs of a beneficiary’s apprenticeship program, as well as a lifetime maximum of $10,000 to pay down a qualified education loan.
One of the key benefits of investing your money in your 401(k), IRA, or in a 529 is that you’re effectively investing in the stock market. While it is riskier than your checking or savings account, you can expect to get a much better return on investment (ROI) over time.
Gains on money invested in 529 plans are tax-free, as are withdrawals when used for college or educational purposes.
5. Increase Your Mortgage Payments
Say you’re 10 years into a $200,000, 30-year fixed mortgage at 6%. Increasing your monthly payment by just $100 could save nearly $19,000 over the life of the loan, and you’ll pay off your mortgage almost three years earlier. In many cases, the rate on your mortgage—with the average 30-year fixed mortgage rate being above 6% (as of October 2024)—is higher than savings account rates.
What Is an Emergency Fund?
How Much Student Debt Does the Average American Have?
Among Americans who have student debt, the average amount was about $47,000, according to the Federal Reserve. The median balance was about $25,000. That means that half of those with student debt had more than $25,000 in student loan debt, and half had less.
What Does the Average American Have in Their Retirement Account?
The average balance in retirement accounts in the U.S. was $334,000, whereas the median—middle of the road—balance was $86,900, the Federal Reserve found.
The Bottom Line
Now that you’ve worked hard to save $10,000, it’s time to get your money working for you. Research all fees and expenses that may come with any investment you choose, as some fees can take a chunk out of your investment over the long-term. Overall, though, following these steps should lead you in the right direction.