Responsible Ways To Use A Monetary Gift

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Nearly 70 percent of Americans have less than $1,000 stashed away. If you think of what the rent costs in major cities, those average savings aren’t enough to cover it. In fact, one study by Freddie Mac showed that the average rent in large cities such as Los Angeles and San Francisco is significantly higher than $1,000. So what happens when people lose their jobs? Well, we’re looking at it right now during the pandemic. As soon as the country shut down back in March of 2020, we saw the pleas showing up online from individuals stating they’d lost their jobs and didn’t know how they’d even make April’s rent payments.

When you think of the financial situation many Americans are in, you can see what a big deal it is when even a “small” monetary gift comes along, maybe $500 in birthday money or $5,000 in commission. Making the most of it when some money does fall into your lap can help you not find yourself in a “How will I pay rent next month?” situation, ever again. We spoke to Jessy B DeFreitas, the President of Blanc DeFreitas and Associates Financial Services about responsible ways to handle a monetary gift.

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What to do with $500

If you’re looking to invest, you may feel sheepish about approaching a financial advisor with $500. But what you can do, says DeFreitas, is open a Certificate of Deposit (CD). This is a product offered by most banks that is a bit different from a savings account because it requires you to give them your money for a fixed amount of time (early withdrawals may be subject to penalties), but will yield higher returns than a savings account. The minimum amount of funds to open a CD is usually rather small, too. What’s also nice about a CD is that it’s insured by The Federal Deposit Insurance Corporation, so it’s quite safe.

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Get a life insurance policy

Nearly half of Americans don’t hold a life insurance policy, which could leave their loved ones in a dire situation if they passed suddenly. If you come into an unexpected $500, DeFreitas suggests getting a life insurance policy. There’s a misconception that these are pricey, but they’re actually less expensive the younger you get them. In fact, a woman who opens one at age 30 might expect to pay less than $200 a year for a policy (which, by the way, is less than what a man would pay – being the risk-averse gender pays off).

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Use $5,000 to open a retirement account

There’s good news for millennials: they’re killing it in the retirement account game and apparently reached record highs in their holdings this past year. So if you come into $5,000, DeFreitas recommends opening such an account if you don’t already have one. Roth IRAs offer a nice tax benefit on the backend. While you invest after-tax dollars, from there, the money grows (compounding interest is very nice, by the way), and when you withdraw it, you do so with the money tax-free as you already paid taxes on the front end. That’s a nice break considering your tax bracket when you put in the money is probably much lower than it will be when you take it out.

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Or open an annuity

Even if you have a Roth IRA or other retirement plans, many humans are outliving their retirement savings these days. It’s an odd problem to have: If you’re lucky enough to live a long time, you may not have enough money to fund your days. An annuity is like an insurance policy for your retirement days. When you purchase one, you enter into a contract, agreeing to make periodic payments. These will accrue interest until the agreed-upon date when the account will start to make payments to you. DeFreitas suggests this as one thing to do with an unexpected $5,000.

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What to do with $50,000

Should something major happen, such as the loss of a loved one who leaves you with an inheritance, you may come into something much bigger. If that happens, there are a few things DeFreitas recommends doing. One such thing is getting into an index annuity. This differs from a fixed annuity in that, while it guarantees a certain return, that amount is fixed, hence the name, so there is no opportunity for higher swings in return. The return you see on your index annuity can vary with the market, but that can mean the potential for very high earnings at certain times. Speak to your financial advisor to get more information and see if this is a good choice for your overall plans.

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Put a down payment on a home

The median price of a home in the United States hovers at just under $300,000, so with $50,000, you could be well on your way to putting a down payment on a house, which is something DeFreitas says could be a good investment. The beauty of a real estate investment that serves as your primary residence is that, even as its market value wavers, it will always offer you one inevitable type of value: a place to live. Zillow reports that the average annual appreciation rate of a home in the U.S. is three to five percent, so a home could be a valuable part of your retirement portfolio.

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Should you keep it for a rainy day?

We asked DeFreitas if there are any difficult financial situations one might consider preparing for and holding onto these unexpected funds to handle. She mentioned holding onto some money in the event of a disability due to illness. The Social Security Administration reports that the current average monthly payout for disability is just a bit over $1,000, which is rarely enough for someone to fund their life while unable to work. So squirreling away some of your new money in case such an event occurs — hopefully not — may be smart.

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Keep it for bouts of unemployment

If you lost your job today, how long could you live on your current savings if another job didn’t come up for a while? This pandemic has shown many people the answer to that question. Even with unemployment benefits, making ends meet can be difficult. Meanwhile, the Bureau of Labor Statistics states the average number of weeks one remains unemployed after losing a job is around 20. That’s five months. If you had no savings before coming into this new sum of money, consider stashing some away in a checking account where it’s accessible – perhaps enough to fund your life for a few months of unemployment.

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What if you have kids?

DeFreitas also brought up a 529 Savings Plan. This is an investment account parents can start for their children that’s typically sponsored by the state and offers great tax benefits. One such benefit is not paying taxes on withdrawals made for qualifying expenses (i.e. education). You can even use the funds to pay for the tuition of kids who are in K through 12 at qualifying schools.

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Should you pay off debt with your gift?

DeFreitas recommends paying off “The highest interest rate loans or credit cards,” should you choose to use your money to pay off debt. “My advice is to tackle one loan or credit card debt at a time but to continue to pay at least the minimum on all loans until you’re rid of all debt.” Experian reports that the average credit card balance of an American is a little over $5,000.

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