What to do with $10k right now

Here we take a look at what an average person with an average risk profile should do if they had managed to save $10k and didn’t know how to best make use of it. Please understand this is not financial advice, it does not take into account your personal circumstances and it’s only here to give you some ideas. References to ‘you’ are to this very average person with a very average risk profile. Without further ado here are, in order of priority, what you should do with $10k right now.

Pay off debts

We’re not talking good debts here (see The good, the bad and the subprime). We’re talking debts you accrued while spending on discretionary, unnecessary items. One defining characteristic of this type of debt is high interest rates. Think debt you took on to finance a holiday (pre 2020 ofc), to buy a car, to buy a PS5 to (try to) run CD Projekt’s highly anticipated flop, Cyberpunk 2077, or to finance some unfortunately ghastly, Birkenstock-inspired fashion choices. If you have a spare $10k in the bank right now and you have a credit card debt, personal loan, car loan or payday loan, consider using it to pay as much of this off as you can. It would be silly for example to pay 20% interest on your credit card debt or 10% interest on your personal loan and instead earn 0.50% interest on cash in a savings account.

Build an emergency fund

If you don’t already have an emergency fund, consider setting some money aside for a potential rainy day. This fund is different to a savings account. You would typically set aside money in a savings account to soon spend on a big purchase like a holiday, a car or a house deposit. An emergency fund is only accessed in the case of well, an emergency. Think loss of employment with no income protection insurance, an expensive and serious hospital bill, or loss of tenants in an investment property with an unexpectedly-long period of vacancy. How much money should you have in this fund? This’ll come down to your level of risk averseness but as a general rule of thumb, 6 months’ worth of expenses is a good estimate.

Buy into an ETF

We’ve spent a fair bit of time talking about ETFs and you can find an introduction to these types of funds under Diversification and ETFs. A broad-based market ETF is likely to deliver a higher average annual return (over a long enough period of time) than interest you might be paying on your mortgage or interest you could be earning in a savings account. Remember however that the savvy equities investor gets into the share market for the long run so this option is really only suitable if you’re looking to set and forget the $10k for a few years at least.

Mortgage

If you have a mortgage and that mortgage comes with an offset account, this may be a good place to stash that extra cash. The interest rate that applies to your mortgage is likely to be higher than any interest rate you can get in a savings account. The money that’s stashed in your offset account reduces the amount of interest you accrue on your mortgage. This is a particularly helpful tip when you consider the tax perks of stashing your money here vs keeping it in a savings account. You have to pay tax on interest you earn in a savings account but you don’t pay tax on interest you save by offsetting your spare cash against your mortgage.

If your mortgage has a redraw facility, you might also consider paying down your mortgage (beyond any minimum principal repayments) knowing that these extra repayments may be accessible later but if your mortgage is for an investment property, do seek professional advice first as there may be tax consequences to doing this.

Savings

Our whole lives we’ve been told that we should be savvy savers and that doing so would go a long way in the future towards building financial security. Unfortunately this advice is now misguided. Because interest rates are so low, stashing money in a ‘high’ interest savings account or a term deposit account is generally-speaking foolish, as you’ll likely earn less than inflation (see Why saving is getting you nowhere).

However, I’ve still included this as an option as there are legitimate reasons why you would choose to save. To cite a few examples, you may not have any debts, you may not have the luxury of time to invest and hold shares, or you may be looking to make a big purchase in the coming months and you can’t afford to take on any unnecessary risk.

I can’t stress enough that the above are merely simple suggestions and that how you can wisely manage a spare $10k isn’t necessarily limited to what I’ve set out here. I fully appreciate that no one will understand the state of your finances or your risk profile better than you would so be sure to do some further independent digging and deal with your money in a manner in which you’re comfortable.