‘I grew up pretty poor’: I got an annual bonus. After I pay off my credit cards, I’ll have $10,000. What should I do with it?

1. My emergency fund is about half funded in a high-yield online savings account, providing me with three months of expenses.

2. I have about $60,000 in student loans. I could pay a few of the smaller loans, as they have the lowest interest.

3. I have a personal brokerage account that I haven’t done much with. I currently have $500 invested in it.

I grew up pretty poor, so I’m not used to getting large amounts of money at one time. My upbringing gave me a mindset to save rather than spend.

Whatever I do, I would like to put the money to good use. Any advice is greatly appreciated.

Learning, Saving and Investing

Related: ‘I received an insurance-claim check for $22,000’: Why does it take five days for my check to clear?

Dear Learning,

You’re in good shape and making all the right moves.

You have an emergency fund through which you’re taking advantage of the high interest rates on offer since the Federal Reserve started hiking rates two years ago. Unfortunately, this has also led to an increase in loan interest rates. The average interest rate for federal and private student loans currently hovers at 5.8%, while the average federal-loan interest rate is around 6.36%, according to the Education Data Initiative. 

So throw at least some of your bonus at your student loans with the highest interest rate. Doing so should feel as good as, if not better than, taking a vacation. If you put a portion of what’s left after paying off your credit cards toward your student debt, add another $4,000 to your savings account and put a chunk — say, $1,000 — into your brokerage account. As you know, with compounding, you earn money on both the principal and the appreciation.

I assume from your letter that you are starting out in your career and that owning your own home may be out of reach at this time, but it won’t always be that way. You will be surprised at what you can achieve if you keep doing what you’re doing: planning ahead, saving and gradually working your way up to a job that has better pay. Ideally, you’re also contributing to a Roth IRA, which allows you to invest post-tax dollars, or a 401(k) with an employer match. 

As your student debt is locked in at a low rate, Paul Karger, managing partner of TwinFocus, a wealth advisory firm in Boston, advises keeping this outstanding for now as you are effectively earning what the investment world calls “a positive carry.” If you can invest your cash at a higher rate (5%-plus) he advises you to do that. “To the extent you do not have any immediate cash needs, we would partially fund a Roth IRA contribution with perhaps $2,000 to $3,000 and maintain the balance in a high-yield savings account for a rainy-day surplus,” he says.

Establishing healthy financial patterns

If your job offers a high-deductible health plan, you may wish to take advantage of a health savings account, or HSA, an account where you can contribute pretax money to use for qualified medical expenses. For 2024, plans have a contribution limit of $4,150 for an individual, up 7.8% over last year, or $8,300 for a family, up 7.1% over last year, according to the Internal Revenue Service. There are pros and cons to these plans: You can read more here.

Everyone will have an opinion on what you should do, but you can’t do everything all at once. You can do the best you can, chip away at your loans, put money aside for a rainy day, and start building up money for a down payment on a home. But people are having a hard time keeping up with rising prices: Credit-card and car-loan delinquencies have hit their highest point in more than a decade. Millennials are particularly hard hit by the former.

What you are doing now is establishing healthy patterns of saving, investing and spending. These will serve you well in the future. Yes, it’s important to enjoy life, too, but you can have a pretty good vacation these days by renting an Airbnb
ABNB,
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with friends and sharing costs. You don’t have to splurge on a five-star hotel or sit by a pool in the Caribbean to feel like you have given yourself a break from work and the sometimes grueling routine of everyday life.

The aim for all good financial planning and happy living — it’s better if these two go together — is to maintain a balancing act between living in the moment and knowing you will have enough money to retire. The sooner you start on the latter, the better. Looking over your shoulder at what other people have achieved can create financial paralysis, and make you want to give up and just think about today. But every small achievement today will be worth a lot tomorrow.

Go easy on the credit cards, and be kind to yourself.

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