I Asked Wealth Advisors What They’d Do With an Unexpected $5,000

An unexpected $5,000 may feel like permission to splurge, but it can also be an opportunity to make meaningful financial progress. Wealth advisors say the best use depends on your debt, emergency savings and long-term goals.

We spoke to some advisors to find out what they would do with such a windfall.

Know Your Financial Picture First

Johnathan Ness, a certified public accountant and founder of Know Money, Yes Money, would first review his entire financial picture. Then, assuming the money was taxable, he would immediately set aside 15% for taxes, give 10% to charity, “give my wife and I each $50 for squirrel fund” and then put the remaining $3,650 in the bank.

Ness happens to be starting a business, so an extra cushion would be welcome.

“Were it not for that, I’d invest half of it and put the other half toward the mortgage,” he said.

Pay off High-Interest Debt First

There’s almost no better investment than debt reduction. Though most of the advisors are not carrying expensive credit card debt, if they were, reducing the balance would be their first step.

Mike Rytelewski,a certified financial planner and wealth advisor at Oujo Wealth Strategies, said that if you have a $5,000 credit card balance at 24%, you’re paying $1,200 per year in interest.

“It’s highly unlikely that your investments would compete with that,” he said.

Build a Starter Emergency Fund Before Investing

Someone without any cash reserves may not want to devote every dollar to debt. Ness, who already has a solid emergency fund, recommended keeping $500 to $1,000 available for emergencies, then applying the rest to high-interest balances, so the next unexpected expense does not immediately land on a credit card.

Rytelewski said that the conventional emergency fund target is three to six months of expenses, but the right amount also depends on a person’s lifestyle, income stability and comfort level.

Invest the Money if Your Immediate Needs Are Covered

Once high-interest debt and emergency savings are under control, the $5,000 could become seed money “that grows a gigantic tree” of long-term wealth, Rytelewski said.

Robert R. Johnson, a financial advisor and professor of finance at Creighton University, would “simply put the money in a low-fee, equity index fund that tracks a broad index like the S&P 500.”

These low-cost index exchange-traded funds can be held in a tax-advantaged retirement account when the recipient is eligible. Then leave it alone to grow.

“Do not touch it, do not look at it, do not think about it. Set it and forget it,” Rytelewski said.

Enjoy a Small Portion Without Squandering the Opportunity

A windfall does not have to be allocated entirely to responsible financial goals. Rytelewski said someone already on track for financial independence could spend more of the money on a meaningful experience.

Ness’s squirrel fund is partly a psychological trick, as well, satisfying the need for some joy without splurging.

“Otherwise, it’s demotivating to work hard if we get no enjoyment from the results,” he said. But he’d keep it small.

He said the biggest mistake people make with windfalls is squandering it on vacation, a big purchase or to “live it up for a while instead of using it to get ahead.” Then, “the money’s gone and they’re right back where they started, having squandered a chance to really improve their situation.”

“You can only spend the money once,” Ness said. “Then it’s gone.” Don’t miss the chance to make some real progress with your finances.

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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