Picture this: That work bonus has finally hit your account. Your side gig is taking off. Or you get an unexpectedly large tax refund. Now you have an extra $5,000—or close to it—in the bank. (Nice.) What could you do with it? A sudden influx of cash could position you to improve your financial situation. But only if you use it wisely.
"If people get a surprise $5,000, there's a tendency to think of it as bonus play money," says Aliya Padamsee, CFA, CFP®, a director of financial solutions at Fidelity. "But think about using it as an opportunity to get ahead, not to stay in the same place."
How you might want to use the money depends on your financial status and goals. Here are some options to help you decide what to do with $5,000.
1. Get on solid financial footing
Have a cash buffer. At minimum, consider keeping at least $1,000 or one month's rent, whichever is more, in a savings account at all times. That way, you wouldn't have to skip paying other bills or rack up credit card debt to pay for an unexpected expense, such as new brakes or a dental procedure. Keep the cash in an easily accessible account.
Pay down high-interest credit card debt. Do you have balances on your credit cards? That answer could help determine what to do with $5,000. Interest accrues on cards each day they're left unpaid, so making a big payment right away could pay off. If you have debt across several credit cards, consider putting more money toward the one with the highest rate first.
2. Build your emergency fund
An emergency fund is a reserve of cash you can tap in case of, well, an emergency. Whether you have a small emergency fund or it's nonexistent, it's wise to dedicate at least a portion of your new stash to building one.
After your $1,000 cash buffer, Fidelity suggests working toward saving 3 to 6 months of your essential expenses (think: major bills and necessities) to help cover you if, for example, you lose your job or have a hospital stay. "If you're single with no dependents and a stable job, 3 months of savings may be enough," says Padamsee. "But it's smart to have 6 or even 9 months of savings when you have a family or you're the sole earner in your household."
It may be convenient to store your emergency fund in your regular bank account. But it is generally a better idea to keep it separate. That way, you avoid dipping into emergency savings for other expenses and goals. Since you may also want to consider cash equivalents for savings goals less than 3 years away, these options can work well for emergency fund savings and short-term savings goals:
High-yield savings account. Bank and credit union savings accounts usually provide a low return on your money, currently a 0.21% average percentage yield (APY), a.k.a. 0.21% of your balance in interest per year.1 You could earn more interest on your money with a high-yield savings account, which could offer rates over 2% APY as of October 2022.2
With a high-yield savings account, you won't have to worry about losing your cash, since these accounts are backed by the Federal Deposit Insurance Corporation (FDIC). But you may be limited to a certain number of withdrawals each month.
Money market account. This account type typically combines savings and checking account features. The interest rates for money market accounts (which are not the same as brokerage money market funds) are slightly higher than savings accounts, with a national average APY of 0.23%.3 Some banks offer much better rates, but you may need to maintain a certain balance to receive them.
You may be able to withdraw from your money market account using a debit or ATM card, which could simplify paying for large emergency expenses. One downside: You may face fees if you withdraw more often than the monthly max.
Money market fund. Money market funds are a type of low-risk mutual fund that are less prone to market fluctuations than stock or bond funds. You could typically earn a return similar to that of a high-yield savings account, with 7-day gross yield rates at nearly 3% for government funds and over 3% for prime retail funds as of the end of September 2022.4
However, an investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Similar to other mutual funds, you’ll likely pay a small percentage of your investment as a management fee. And like a high-yield savings account, they may carry withdrawal restrictions or fees if your balance drops below a certain amount.
3. Time your short-term goals to earn more
If your emergency fund is all set, you may want to consider investing a portion of your extra cash for short-term savings goals with a defined time horizon.
Certificate of deposit (CD). CDs, which are FDIC-insured, let you lock in interest rates over a predefined term, such as 3 months or a year. They may pay a slightly higher yield than other FDIC-insured options (see the latest brokered CD rates).
But there's a catch: You'll have to pay penalties if you withdraw your funds before the term is up. "Remember that CDs are not fully liquid," says Padamsee. "They can give a slightly higher yield, but this only works if you don't plan to dip into the money regularly." That means that while CDs are not ideal for storing your full emergency fund, they work well if you can anticipate when you'll need the money.
4. Consider long-term investments
If you have a healthy emergency fund of 6 months or more, you've paid down any other high-interest debt (our guideline is 6% or higher), and you're capturing the full employer match for your workplace retirement savings account, then you may want to consider longer-term investments for your extra funds.
Stocks and bonds. These are probably what come to mind when you think about how to start investing. A stock gives you partial ownership in an individual company, while a bond is a loan you give to a government, agency, or corporation that is repaid with interest. You could potentially make money if the stocks you hold rise in value—or lose money if they drop. Bonds typically make interest payments until a set date.
Exchange-traded funds (ETFs) and mutual funds. Both ETFs and mutual funds offer a basket of securities (such as stocks or bonds) inside one investment. You could put a few of them together to create a portfolio or buy an all-in-one fund—an easy-to-manage diversified option. Target date funds are an asset mix of stocks, bonds, and other investments that automatically becomes more conservative as the fund approaches its target retirement date and beyond. But remember, the principal invested is not guaranteed.
Getting some help. Investing in individual stocks, bonds, or funds takes a lot of time and research. But there are many ways to get help creating and maintaining your portfolio. An investment provider like Fidelity can help you create a personalized investment plan based on your goals. You can also choose to have your money managed for you with an affordable robo advisor, such as Fidelity Go®, where you answer a few questions online, we'll suggest an investment strategy, and our investment professionals will manage your money according to your selected investment strategy, making adjustments as needed to help keep you on track.
5. Treat yourself
You didn't think we'd leave this out, did you? Once you've set yourself up with a strong financial foundation, polished up your emergency fund, and considered your short- and long-term goals, think about using some of your extra money for something fun. Celebrating wins with smaller incentives, such as a fancy dinner out or a weekend away, can help reinforce your good habits and motivate you to keep making wise money decisions over time.