Got a Raise or a Birthday Check? 5 Smart Things You Can Do With That Extra Cash

how to manage unexpected money

What would you do with a free $1,000? Let your mind run through the possibilities.

You might have thought immediately about a big-ticket item you’ve wanted to purchase or a vacation you’ve been trying to take.

But once the little devil’s advocate on your shoulder quits talking, you might instead want to consider ways to grow the money or giving it away to charity.

Sitting on it won’t be a high priority. You don’t have to be an expert on the time value of money to know that the longer you hold the cash, the less it’s worth. The trouble is, there’s no one universal solution for where to put that windfall.

5 best ways to use $1,000

A four-digit windfall might be more realistic than you’d assumed, at least when you consider your chances of scoring a raise at work, winning the grand prize on bingo night, or receiving a big birthday check from your grandmother.

But what would you actually do with it?

Well, forget everything you think you want to do with that money and consider these five wise choices instead.

1. Build your emergency fund

There comes the point where you realize living paycheck to paycheck is impractical. For one, it doesn’t allow you to stash away money for a rainy day. Unfortunately, about 69 percent of adults don’t have at least $1,000 saved, according to a 2016 GOBankingRates survey.

Although you might feel that your debt obligations are a higher priority, having an emergency fund puts you in a better position for the unexpected. Imagine having an account you could go to if you suddenly had a health or job scare, for example.

The money doesn’t have to sit there either. You can grow it and keep it accessible by depositing it into a high-yield online savings account or a similar vehicle.

2. Pay off your credit card debt

Whether you have some backup savings, you might be tempted to prioritize your credit card debt. You could make a strong argument for it, too.

After all, there are many reasons why credit card debt is worse than student loan debt. For one, the interest rates are much higher, often twice as high. For another, there are no forgiveness programs that can wipe away your credit card debt.

If $1,000 clears your balance — or pushes you part of the way there — count it as a victory. Attacking your highest-interest debt first (also known as the debt avalanche method) gets you to the finish line the fastest.

3. Make a big monthly student loan payment

Your student loan debt was probably a better investment than your credit card debt. It got you an education, hopefully, even a degree.

Chances are you have a much higher student loan balance, but you might think that $1,000 won’t make a big dent.

The math tells a different story. If you make a lump-sum monthly payment of $1,000 toward a $20,000 student loan debt at 5.00% interest, for example, you could shave eight months off your loan term. Enter your personal amounts into our extra payment calculator to see what $1,000 could accomplish in your case.

Lump Sum Extra Payment Calculator

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When making bigger-than-usual student loan payments, though, make sure they’re paying down your principal and not just interest. If you’re following the debt avalanche method, you’ll probably want the $1,000 dedicated to the highest-interest loan, not spread evenly between a handful of loans.

4. Invest it according to your goals

You wouldn’t be alone if the idea of a free $1,000 made you wonder about doubling it at a casino. Gambling is different than investing, however, and isn’t as wise of a decision if you have long-term savings goals.

Ask yourself where you are in your life and what the best next step should be. If you’re worried about diversifying your portfolio, for example, $1,000 is enough to get started in real estate investing.

If you’re more concerned with learning to invest, it’s plenty of seed money to set up a Roth IRA. Unlike with an employer-sponsored 401(k), you’d have to pay taxes on the $1,000 income, but eventual withdrawals would be free from Uncle Sam’s hands. You’d also have more freedom to invest in what you want, not what your 401(k) administrator chooses.

5. Continue your education

If building wealth is still secondary to increasing your regular income, you might prefer to invest that $1,000 into yourself. However, it’s probably not enough money to cover an associate’s degree or one of the top continuing education programs.

But combining that windfall with scholarships and grant aid that doesn’t need to be repaid could get you back into the classroom. The average cost of a community college degree is $2,700, according to Value Colleges. If you’re not sure what you’d want to study, you could also take a pay-per-course approach at an online education website like Udemy.

Your $1,000 investment here might take longer to pay off, but it could result in a higher annual salary or at least a happier career path.

What’s the best path for you?

Depending on your situation, holding onto your $1,000 might be the best move after all. Maybe you need to furnish your new home on a four-digit budget, for example.

The truth is, the best way for you to spend that extra cash might be different than for someone else. It could even be different for your significant other.

No matter how you’d handle the windfall, your best bet is to consider ways to make your own $1,000. After all, it’s better to be proactive than to wait around for luck.

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