Where to Put an Unexpected $5,000, Part 3

If you’ve been lucky enough to come across $5,000 for which you haven’t been planning, you may be wondering what the best plan would be. Considering CNN has 43 suggestions for you, there are many options. I’ve had some thoughts on CNN’s list which I’ve shared so far here and here. Here is the next batch of suggestions.

16. Best way to avoid a meltdown: Take those gains, pay those taxes
17. Make your money last a lifetime: iShares Dow Jones Select Index ETF
18. Make your money last a lifetime: iShares Russell 3000 Index
19. Best home upgrades: A 625-square-foot patio
20. Best home upgrades: Fresh kitchen cabinets
21. Best home upgrades: Carriage-house garage doors
22. Best debt-defying move: Pay down your HELOC
23. Best way to advance the clock: Prepay your mortgage
24. Best moves if you’re buying a home: Put $5,000 toward a 20 percent down payment
25. Best moves if you’re buying a home: Set aside the $5,000 where you can’t touch it

If you’ve been holding onto a stock because you’ve been afraid of paying long term gains tax, the $5,000 can go a long way by paying taxes on a $33,000 gain. A tax bill is not a good reason to hold onto a stock. If the investment isn’t right for you, the sooner you get rid of it, the better.

CNN Money picks some exchange-traded funds for long-term investing. The first, DVY, which matches the index of 100 of the highest paying dividend stocks. The other suggestion is the iShares Russell 3000 Index (IWV), an ETF matching a large-cap index.

The article suggests several ideas for homeowners, putting that $5,000 to work in improvements in their homes. I think this is a good idea for those who would get enjoyment from some upgrades, but don’t expect these upgrades to return that $5,000 when it comes time to sell.

Paying down a home equity line of credit is good use of the unexpected funds. CNN says, “At today’s average rate, paying down a HELOC is like earning as much as 8.7 percent with no risk.” The line of reasoning is a little suspect, because you’re not earning money, just avoiding interest expenses you’d have to pay. But in a world where everything is simplified, the emotional meaning in the statement is what’s important.

The same line of reasoning is often used to rationalize paying the mortgage early. This is a good idea (as long as your lender doesn’t penalize you) because it’s good to reduce the total interest spent on the mortgage, but you may get a better return by investing the money. It’s not purely a financial decision; some would rather get rid of the debt as soon as possible and unloading that burden, even if it means they end up with a lower net worth than they would have had.

Some time in the next few days, I’ll finish up this series.