$10K Windfall? Financial Advisors Reveal the Smartest First Moves To Make
Having an extra $10,000 land in your lap might seem like a good reason to splurge. After all, it’s enough money to take a dream vacation or buy a nicer car than you planned.
However, before you start spending, you might want to think about what that money could do for your finances instead. To help, MoneyLion asked financial advisors to share the first move they’d make with an extra $10,000 and why.
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Pay Off Your Credit Cards
The first thing you should do, according to Gerry Keene, FSCP, LUTCF and financial advisor with over 20 years of experience, is pay off your credit cards or other unsecured debt.
“Paying off your credit card debt improves your cash flow and saves you significant interest charges,” he said.
Christopher Walsh, senior financial advisor and regional director of Capital Choice Arizona, also said he would advise his clients to pay off debt first.
Paying off your debt is easier with a step-by-step method such as the debt snowball or debt avalanche. Here's how they break down:
Debt snowball method: This helps you build momentum by resolving your smallest debts first. It involves making minimum payments on all your debts while putting extra money toward your smallest debt. Once your smallest debt is paid off, put all of the money you were paying toward it (minimum payment plus extra money) toward your next smallest debt. Keep making minimum payments on all of your other debts. Repeat this cycle until all of your debt is resolved.
Debt avalanche method: You can save a lot of money in interest charges with this approach. It requires you to make minimum payments on all debt, while putting extra money toward your highest-interest debt, no matter the balance. Once you’ve paid off your highest-interest debt, combine the money you were paying toward it with the minimum payment on your next highest-interest debt while you continue making minimum payments on your other remaining debts. Repeat this cycle until you pay off all your debt.
Next: Create an Emergency Savings Account
If you don’t have any unsecured debt, the next step is to create an emergency savings account. Keene said creating and maintaining an emergency fund can help keep you out of credit card debt.
Walsh agreed that building an emergency fund would be the next priority if no debt needed to be paid off.
Experts generally recommend keeping three to six months’ worth of expenses in an emergency fund, which can feel overwhelming. For example, if your expenses are $4,500 per month, saving $13,500 to $27,000 can feel like a lot.
To make it easier, consider breaking your savings goal into smaller chunks, such as saving $2,000 by a certain time. Once you’ve achieved that goal, pat yourself on the back and make a goal for saving another $2,000. Track your goal with an app, a spreadsheet or a printable savings tracker.
Next: Fully Fund an IRA or a Roth IRA
If you don’t have unsecured debt and your emergency savings account is set, fully fund an IRA or Roth IRA, advised Keene. “Saving for retirement allows you to take advantage of your age and the compounding that comes with it,” he said.
Walsh offered similar advice, but more broadly. He recommended focusing on long-term savings goals such as "investing towards retirement, saving for college, paying off [your] house early [and] things to that effect."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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