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Investing

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September 15th, 2020

The Best Way to Use $1,000

Let’s face it: learning to manage your money is not a simple task.

If you cannot manage $1,000, you will struggle even more to manage $1,000,000.

The best way to learn how to manage your assets is to start in small increments. Let’s look at the three most effective ways to allocate $1,000 that will create long-term habits to improve your financial health: replenishing your emergency fund, paying off credit card debt, and investing in your Roth IRA.

Chances are that during COVID you became familiar with the importance of an emergency fund. Over 100,000 small businesses across the nation have closed their doors for good, and over 30 million Americans faced unemployment as a result.

In times like COVID where the economy is unpredictable, having a suitable emergency fund is essential. This fund should have three to six months worth of expenses to be used to protect yourself from unforeseen circumstances.

If an emergency fund is not set in place, people will often begin taking out loans or using high-interest credit cards that will lead to further expenses down the line. If your emergency fund needs replenishing, first allocate as much as needed to fill this account back up.

With any financial plan, getting rid of debt is the first priority. In March of 2020, credit card balances carried from one month to the next reached ~$438.8 billion, a ~6% total increase in total credit card debt from 2019.

On average, this year, U.S. households carrying credit card debt from month to month will be charged an additional $1,162 in interest from their bank. Not only does this add unnecessary expenses to yearly spending, but it also harms your credit score.  Use any money left after replenishing your emergency fund towards paying off credit cards.

(The bottom line is this: if paying off your credit card bill each month seems unattainable, re-evaluate your spending habits. If you can not afford to pay off a purchase by the due date, then you likely should not be making it in the first place. Wait to take that vacation or buy that new computer for when you have acquired the funds to do so.)

Finally, use whatever is left of the $1,000 to fund a Roth IRA (individual retirement account). Though it may seem early to start investing in retirement accounts, by the time most Americans reach the age of retirement, they have not reached the amount of savings needed in their account. With a Roth IRA, upon retirement you receive the distributions tax-free.

Simply put, the more money you put into the IRA account, the less taxes you will pay in the long run.

There is a common misconception that in order to enact change in your financial habits, you need a large sum of money to work with. However, with just $1,000 in your hand, you can start to develop the right habits for how to properly invest in yourself and your future with these 3 simple strategies.