Knowing how to invest a cash windfall can be complicated. That’s why we consulted the pros

What would you do with an extra $1,000? There isn’t a single easy answer: Knowing where and how much to set aside ultimately depends on the person and their financial situation, says Nicholas Bunio, a certified financial planner with Retirement Wealth Advisors.

“If you carry a lot of bad debt, such as credit cards, personal loan or a second mortgage, you should pay that off first — or down — with this extra $1,000,” Bunio says, adding, “If you don’t have six months to a year of cash saved for an emergency, put that money there.”

“Conventional finance wisdom often says a minimum of three to six months worth of living expenses is needed in the event of job loss or other costly unforeseen expenses,” says Aaron Wiegman, wealth manager at Savvy Advisors. “You may have other short-term goals to save for as well that you’ll need to account for on top of that,” he adds. (See some of the highest-paying savings accounts you can get now here.)

For those feeling financially secure, Bunio and other finance pros say the decision on how to invest or use that extra windfall can vary. “Once you have a strong emergency fund, it’s time to start investing in your future. Investing even small dollar amounts over a long period of time can have a dramatic impact on your overall financial wellness,” says Ed Williams, senior lead planner at Facet. “Time is an investor’s single most powerful ally, and investing as early as possible will help you reap the benefits of long-term growth.” 

When it comes to investing, one rough rule of thumb is the so-called 50/15/5 rule — designed for planning, saving and spending. With this rule, consumers would allocate 50% of their take-home pay to essential expenses, 15% of pretax income into a retirement plan and dedicate 5% towards short-term savings. 

Whether or not you stick with a strategy like that, Wiegman says it’s important to take into account your personal risk tolerance and capacity for losses. “Many studies have shown that the pain of losing money can be twice as powerful as the pleasure you get from equivalent gains,” Wiegman says. “This may lead some investors to be too conservative with their long-term investments or go to cash until they see the market get better.”

Here’s what five financial advisors would do with an extra $1,000. (Looking for a new financial adviser? This free tool can match you to an adviser who meets your needs.)

Put it in a Roth IRA, says Savvy Advisors’ Wiegman.

Wiegman says the extra cash would do best in a Roth IRA or a low-cost index fund tracking the S&P 500, Nasdaq, or Russell 3000, for example. Admittedly, he says, those approaches may not work for everyone. “I might have a higher risk tolerance than others, and with a long time horizon, I can withstand the market’s ups and downs over time,” Wiegman says. “By paying taxes up front and placing the funds in the Roth, I will be able to take distributions out of the account years later and not have to worry about paying income tax on the earnings.”

Invest in stocks and REITs, says Retirement Wealth Advisors’ Bunio.

Taking into account everyone’s own level of risk and comfort, Bunio says. He admittedly notes that investing in financial markets right now is altogether tricky. That said, he adds,  “I do have a stock and REIT I’m looking into buying for myself. And my clients.” 

While Bunio says he can’t mention specifics for compliance reasons, he adds, “the company is a drug manufacturer which has a lot of promise with weight loss and blood sugar regulation — and potential for other health benefits due to having better weight management and lower blood sugar.”

For the REIT, Bunio says he’s looking into an ETF for a passive approach with lower overall fees. “Many REITs out there are active funds with high fees that tend to cut into the client’s rate of return,” Bunio says, adding that the one he has in mind “also doesn’t have much exposure to commercial real estate, since this sector has been hit hard due to high interest rates. It has a high dividend, it’s liquid so it’s easy to buy and sell, and has mostly exposure to farm land, apartments and healthcare or hospitals.”

Do a backdoor Roth IRA contribution, says Facet’s Williams.

Williams suggests he would take a similar route and “make a 2024 backdoor Roth IRA contribution,” referring to a strategy that involves rolling a fully contributed traditional IRA into a Roth IRA. “Later in life, I’ll be able to access all the money in my Roth IRA tax-free.”

For those considering this approach, there are some simple rules to follow, according to a NerdWallet report. As one allowable method, rollovers from a traditional IRA must be deposited into a Roth within 60 days. The rollover may also be completed as a trustee-to-trustee transfer, in which the traditional IRA provider contributes directly to your Roth IRA provider, or as a so-called same trustee transfer where you make the contribution within the same financial institution. 

Invest in an ETF tracking the broader market, says Matt Kasper, executive advisor at Modern Wealth Management.

Kasper says if granted the opportunity to invest $1,000 of liquid cash, he too would implement a more long-term strategy. “Personally, I would take risk and invest in an ETF [exchange-traded fund] or fund that represents the broader stock market to support my retirement that is still 20-plus years away,” Kasper says, adding, “I understand the excitement to risk all $1,000; meaning if I had a YOLO [You Only Live Once] account, investing in AI, digital assets even the Magnificent 7 stocks [Apple ( AAPL, 1.39% ), Microsoft ( MSFT, 0.41% ), Alphabet ( GOOG, 1.10% ), Amazon ( AMZN, 1.50% ), Meta Platforms ( META, -0.69% ), NVIDIA ( NVDA, 1.60% ) and Tesla ( TSLA, -1.12% )] — and they all have a great appeal, but if you ever watched the movie The Magnificent Seven, please note they do not all survive.”

For many consumers, $1,000 may not sound like a lot. Nevertheless, Kasper assures it’s still a good starting place for a long-term retirement account. “The key to exponential growth is starting early and having a disciplined accumulation strategy along with taking prudent risk,” he says. “A retirement vehicle with tax free appreciation like a Roth account will provide you with even greater flexibility to spend guilt free once you get past 59 1/2 and into retirement.”

Make a more balanced portfolio, says Bryan Hasling, a CFP with Modern Financial Planning.

Hasling says with any cashflow windfall he would first look at the things he would not choose to invest in. “From my personal experience, chasing the flavor of the week is generally a losing strategy,” Hasling says. “Even if you win in the short run, tastes and appetites change, and it can become a full-time job rotating between as they fall in-and-out of favor.” 

Then, Hasling says, he would then turn to his current needs. “Will I need this cash anytime soon?  If yes, I have no business investing in anything volatile or illiquid, like stocks, crypto, or even real estate,” he says. “If this cash is purely for my future and I won’t need it for a few years, I can then start to look at stock investments that help me maintain a balanced portfolio.”

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