It’s a wonderful day: the first time you realize you actually have some money in the bank. But it comes with a new question you’ve never had to answer before: What should you do with your excess money?
Unfortunately, many people never take the time to explore that question thoroughly. They shrug their shoulders and go find something fun to buy on Amazon, telling themselves they’ll learn more about personal finance at another time.
Yet saving money and investing it well are some of the most important skills for building wealth. And they’re surprisingly simple to learn and implement — no special classes or innate gifts required.
If you find yourself with $1,000 or more in your bank account, start with these easy steps to improve your finances, meet your goals, and build lifelong wealth.
What You Definitely Need to Do
Everyone starts from a different point on their financial journey. Even so, there are a few universal steps that apply to nearly everyone.
If you don’t currently use a free checking account, start by opening one. Watch out for monthly maintenance fees triggered by failing to keep a minimum balance in your account. There are plenty of free checking accounts available on the market today, such as BBVA and Chime, which offers automated savings transfers.
Once you have a free checking account to manage your monthly expenses, it’s time to start positioning yourself for long-term wealth.
1. Pay Off Unsecured Debts
While mortgage loans and car loans tend to offer low interest rates since they’re secured by collateral, the same can’t be said of unsecured debts such as credit card balances, student loans, and personal loans.
Before doing anything else, pay off your credit card balances. The average credit card rate in the U.S. is over 17%, which makes credit card debt an extremely high priority. Use the debt snowball or debt avalanche methods to pay yours off as quickly as possible.
In the meantime, you can save on interest by opening a low-APR credit card that offers a 0% introductory period on balance transfers to buy yourself some time while paying off your balance.
Personal loans and student loans can also sap your financial strength and affect your credit score. Even if you decide to simultaneously put money toward other financial goals, such as retirement or a down payment on a house, set aside extra money each month to pay down all unsecured debts as quickly as possible.
2. Create an Emergency Fund
Everyone needs an emergency fund. The recommended size differs, sometimes dramatically, but no one is spared from unexpected bills, so everyone needs to set aside money for them.
Conventional wisdom suggests you keep between one and six months’ living expenses in an emergency fund. The more irregular your income or expenses, the more money you should keep in your emergency fund.
Start with a high-yield savings account. You can earn between 1.5% and 2.5% interest in today’s accounts through banks like CIT Bank, which might at least keep pace with inflation. Savings accounts are FDIC-insured and 100% liquid, giving you instant access to your money in an emergency.
But your emergency fund isn’t limited to savings accounts. Some people keep several layers of accounts they can draw on in an emergency to minimize the opportunity cost of keeping so much cash in relatively low-yield accounts.
I personally keep around two months’ living expenses in cash, plus another few months’ living expenses held in low-volatility investments, with several unused credit cards as an additional source of funds if needed in an emergency.
3. Open an IRA
Just as everyone needs an emergency fund, everyone needs to save for retirement. Sooner or later, the day comes when you’re no longer willing or able to work. And given the increase in older workers being pushed out of their jobs, we all have less control over the timing of our retirement than we realize.
One easy way to invest for retirement is an individual retirement account or IRA. These accounts come with strong tax benefits to sweeten the deal.
Best of all, these accounts are extremely simple to open. You can open them through any investment brokerage, such as M1 Finance, Robinhood, or Vanguard. It takes about five minutes to open an account online, and you can start investing for retirement immediately.
Pro tip: If you already have an IRA (or 401k) open, make sure you sign up for a free analysis from Blooom. Once you connect your accounts, they will help you find the right asset allocation and check that you’re properly diversified. They will also check to see if you’re paying too much in investment fees.
4. Open a Taxable Brokerage Account
While you’re at it, open a normal, taxable brokerage account at the same time you open an IRA. You can do it simultaneously to knock out both proverbial birds with one stone.
Your IRA comes with restrictions, such as annual contribution limits and penalties if you withdraw money before retirement, but your taxable brokerage account is far more flexible. You can contribute, buy, sell, and withdraw money as you like.
Many new investors feel intimidated by the process of creating an account and choosing investments, but they need not be. The setup process is simple, and if you don’t know what to invest in, start with a few index funds that give you broad exposure to the market.
Consider a fund that mimics the S&P 500 (such as VFINX), a fund that includes U.S. small-cap companies (such as SCHA), and a fund for international companies (such as SCHF).
Alternatively, you can delegate the investment choices entirely. Review some of the best robo-advisors, like Betterment, to get free or inexpensive investment advice, and let them automate your investments for you.
No matter how little you invest, the important part is simply to open the account and make your first investment.
5. Start Building Passive Income
Remember the tale of the golden goose that laid a golden egg every day? That’s how passive income works. You buy an investment that keeps paying you income, month after month, year after year.
With enough golden geese, your day job becomes optional. That’s the key to financial independence: building enough passive income streams that you can pay your bills with them alone.
Plus, income arrives even while you’re sleeping, playing with your kids, or out with friends.
Passive income can come from bonds, rental properties, REITs, dividends from stocks, businesses, and many other sources. The more of it you have, the less you have to rely on income from your job, and the closer you get to being able to retire early if you like.
Some income-producing investments, like rental properties, require thousands of dollars upfront. But others you can invest in with under $1,000 and start collecting income right away.
Your savings should make money for you, rather than you continually having to work for it.
What You Should Consider Doing
Everyone should have an emergency fund, an IRA, and a brokerage account. Some other financial moves are great for certain people but not for others.
Depending on your goals, consider the following financial moves as you decide what to do with your savings to design your perfect life.
6. Save for a Down Payment on a House
Not everyone is a good fit for homeownership. Some people move too often, need the flexibility to move quickly, or simply don’t want the headaches of maintenance and repairs.
But others dream of a home of their own that they can modify however they wish. If that’s you, start planning ways to come up with a down payment. If you have a Roth IRA or other retirement accounts, you have additional options to tap into them for a down payment.
Beyond Roth IRA accounts, high-yield savings accounts are a great place to save for your down payment. As a way to trick yourself into saving more money, name the account “House Down Payment Fund” to remind yourself why you’re funneling so much money into it. It’s always more motivating when you’re clear on why you’re saving money.
Once you’re ready to shop for a home, compare loan quotes through services like Credible* and Lending Tree. You can find the cheapest loan without having a dozen lenders ruin your credit by pulling your report.
7. Contribute More to Your Employer-Sponsored Retirement Account
Everyone should contribute whatever their employer will match — it’s essentially free money. But too many employees stop there and don’t contribute any more to their retirement accounts.
One enormous advantage of employer-sponsored retirement accounts such as 401(k)s, 403(b)s, and even SIMPLE IRAs, is that you can contribute far more to them each year than to your IRA. So if you’ve maxed out your IRA contributions, consider ramping up funds to your employer-sponsored retirement account.
You get the tax benefits of reducing your tax burden while building a nest egg to retire rich.
8. Start a Side Hustle
A whopping 43% of Americans with full-time jobs also have a side gig or side hustle, according to a study reported by Fortune. The percentage is even higher for adults under 35, with 49% working a side hustle.
I invest in rental properties for extra income. My friend Zack leads local food and beverage tours. My stepmother carefully researches and picks individual stocks to handily beat the market each year, bringing in more money than most people earn at their full-time jobs. And I know plenty of others besides myself who earn money on the side by blogging.
If you’ve ever dreamed of starting a business but worry about the risk of quitting your full-time job, look for ways to start your business on the side. Start small, keep your job, and invest time and money as you can spare them.
9. Invest Indirectly in Real Estate
Most new investors think they have to buy brick-and-mortar properties if they want to add real estate to their portfolio. But in today’s world, it’s easier than ever to invest in real estate indirectly with a few clicks.
The classic option is REITs or mREITs, which trade on public stock exchanges. You can buy them through your IRA or brokerage account.
But REITs fall under strict regulation by the SEC and are required by law to pay out 90% of their profits in the form of dividends. That makes it difficult for them to grow their portfolios and their underlying value.
More recently, private real estate crowdfunding websites have risen as a competitor to publicly traded REITs. Once limited to accredited investors, several now allow anyone to invest, including Fundrise, DiversyFund, and Groundfloor.
10. Invest Directly in Real Estate
If you’d rather own properties yourself, there’s nothing stopping you.
You could flip houses, buy rental properties, or any number of hybrid options. For example, you could combine homeownership with flipping by doing a live-in flip, renovating and improving the property over the course of a year or two before selling for little or no capital gains tax.
Or you could buy a property, renovate it, and then refinance it to keep as a long-term rental, perhaps even pulling your initial down payment back out when you refinance.
If that sounds like a lot of work, you could buy a turnkey rental property instead. They come either already rented or in rent-ready condition, and you can find them easily using platforms like Roofstock.
Just make sure you know what you’re getting yourself into. New investors tend to underestimate expenses when running the numbers, whether for flips or rental properties.
Remember less-obvious expenses like vacancy rate, repairs and maintenance, and property management costs for rentals, and budget plenty extra for renovation costs, carrying costs, and two rounds of closing costs for flips.
11. Buy Better Health Care Coverage
If you have bare-bones health coverage — or, worse, none at all — now may be a good time to boost your coverage. We all think we’re invulnerable until the universe proves we aren’t.
That could mean buying a traditional health insurance plan. But it could also mean opening a health savings account (HSA) through Lively to set aside money tax-free to supplement a high-deductible insurance plan.
In fact, HSAs offer the best tax benefits of any tax-sheltered accounts, with triple tax protection: Your contributions are deductible, the money grows tax-free, and withdrawals are tax-free when used for health-related expenses.
If your job doesn’t offer any health benefits, or you don’t have a traditional full-time job, research the many ways to get health coverage without an employer-sponsored plan.
You may be surprised at some of the options available on the market today, as the field has evolved rapidly in the last decade or so.
12. Buy Life Insurance
No one likes to think about their own mortality, but the simple fact is that young, healthy people sometimes die. And if you’re the sole or primary breadwinner in your family, you could leave them with no immediate source of income if you meet your maker tomorrow.
Start with a quick overview of the different types of life insurance, as policies vary widely. Compare rate quotes online before committing to one insurer, and look into online-based firms like Bestow, as many offer better pricing on policies than traditional brick-and-mortar insurance corporations.
You don’t necessarily need an expensive policy. Everyone’s circumstances are unique, so get a sense of how much life insurance you need, and remember that you can always start with a smaller policy for a few dollars per month and grow your coverage alongside your family’s needs.
Some financial priorities are universal, such as getting out from under high-interest credit card debt. Other priorities depend on your personal goals.
As someone pursuing financial independence and retiring early (FIRE), I put a massive amount of my income toward investments that generate passive income. I have friends who put every spare penny into improving their homes, creating a lifestyle that allows them to travel, or fertility treatments.
The important thing is prioritizing your financial goals. Too many people thoughtlessly spend hundreds of dollars on clothes, spa treatments, or gadgets each month, without bothering to prioritize their spending.
By all means, set whatever budget you like for those expenses. But remember that your money is a finite resource, and the more you spend in one area, the less you can put toward other financial goals like buying a house or starting a business.
Just make sure you get intentional with your financial goals and that your budget reflects your financial priorities. It’s a good problem to have when you start wondering what you should do with your extra money.
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