What to do with $1,000 now

Wouldn’t it be great if there were a seed you could plant to double your money? Well, there is. Whether you start with $1,000, $10,000, $100,000 or a cool $1 million, many strategies let you grow your money quickly. Just follow the Rule of 72. Divide 72 by your investment’s expected annual return—6%, 8%, 10% or more—to discover how many years you’ll need to double your money. So if you get an annual return of 10% on your investments, you’ll double your money in seven short years. But just as important are strategies that improve the quality of your life. They may not beef up your bank account right away but they can pay off in spades in other key areas down the road. Interested? Read on as MoneySense shows you how.

What to do with $1,000

At some time or another, we’re all bound to get a tidy $1,000 windfall. It will likely come in the form of a tax refund cheque, a stock dividend payment, money from the sale of a used car or perhaps even a hefty birthday gift from Grandma. But wherever it comes from, make no mistake, $1,000 can get you well on your way to improving not only your finances but also your career path, family life and personal growth. We’ll show you how. Pay down your debt Heather Rennalls, a 49-year-old social services provider in Woodstock, Ont., knows exactly what she’ll do when she gets her $1,000 tax refund. “I’ll pay down my debt,” says Rennalls, who owes $3,400 on a line of credit and $22,244 in mortgage debt. Her goal is to pay these off in 18 months so she’ll be debt-free by 51. “I have other goals but to reach these, I have to focus first on paying off debt. That will allow me to make a career change and start focusing on retirement planning in earnest. Short-term pain for long-term gain.” She’s right. Debt limits options so eliminating it should be a No. 1 priority—ahead of saving, investing or buying a new car. It’s also a simple way to double your money. Say you have $1,200 of debt on a credit card charging 19% in interest. If you pay only the minimum monthly payment, it will take 11 years and 6 months to pay it all off. Total interest is a hefty $1,113—almost what you had on your card to start with. But take that $1,000 and pay down your credit-card debt now and the debt could be totally paid off in three months, saving over $1,000 in interest. In one fell swoop you’ve doubled your money. The same concept also works for your mortgage. A $180,000 mortgage at a fixed rate of 5% with monthly payments of $1,052 takes 25 years to pay off. Total interest would be a whopping $135,675. Apply your $1,000 tax refund to your mortgage each year and the interest saved over the total mortgage term would be $20,755, and you’d be mortgage free three years sooner. Every dollar put towards the mortgage is almost doubled by saving interest over the mortgage’s life. “You should minimize your debts at all times but certainly be out of debt—including mortgage debt—by age 60,” says Alfred Feth, a fee-only adviser in Waterloo, Ont. “It makes the money decisions in your life so much easier.” Toronto-based financial coach Avraham Byers recommends keeping a daily spending journal. “If you spend more than you make, nip it in the bud.” Focus on a few spending goals at a time—stop eating out or limit dry-cleaning bills. “Once your budget balances, you’ve found the sweet spot,” he says. Tackle the high-interest-rate debt first, consolidate debts to a lower-interest rate, or cut up your credit cards if you can’t pay off total balances each month. “Set a date when you want to be debt-free,” says money coach and author Sheila Walkington. “Once set, you’ll be surprised how creative you can be at achieving this—saving you thousands in needless interest payments.” Invest in a TFSA If there’s one thing Canadians love, it’s saving on tax. Tax-free savings accounts, introduced in 2009, let you save and invest without paying any tax on growth. All interest, dividends and capital gains are sheltered, even when you withdraw the funds. “I use the TFSA to maximize the value of my money,” says U.J. Ramdas, a 25-year-old therapist and entrepreneur whose annual tax refund is $2,000—half of which goes to his TFSA. “The $1,000 is deposited straight into the TFSA so I don’t see it. I buy stocks and bonds, depending on my research. That’s money going towards the future. It will grow over the years.” TFSAs are especially effective for those who maxed out their RRSPs or who, like Ramdas, earn under $50,000 and are in lower tax brackets. Annual TFSA contribution room was raised to $5,500 in 2013. Any Canadian over age 18 can contribute, while unused contribution room carries over indefinitely to the future. If you haven’t yet contributed, you have $25,500 available currently, even if you haven’t yet opened an account. Unlike RRSPs, contributions to TFSAs are not tax-deductible but they have several advantages. In addition to tax-free growth of the investment income, withdrawals don’t affect income-tested government benefits like Old Age Security (OAS), the Guaranteed Income Supplement (GIS) or GST/HST credits. “It’s great for additional savings for retirement and shorter-term goals like building an emergency fund or saving for a home down payment,” says Sheila Walkington, co-founder of Money Coaches Canada. Choose a self-directed TFSA investment account that lets you hold stocks, bonds, mutual funds, exchange-traded funds (ETFs) and other investments that can generate higher returns than savings accounts. A portfolio of 50% bonds to 50% equities is likely to return 6% a year, doubling your money in 12 years. “A portfolio of solid blue-chip, dividend-paying stocks can return 7% annually,” says Toronto fee-only adviser Jason Heath. “Small-cap stocks, about 9%.” Riskier IPOs or micro-cap stocks have potential for huge returns—12% or more—doubling your money in six short years. But be careful. “There’s more volatility when you take on more risk,” says Heath. “You have to do a good assessment of the risk.” For long-term goals like retirement, dividend and growth funds or a balanced portfolio of ETFs make sense. “You’re keeping costs low and getting solid returns that can average 6% a year,” says fee-only adviser Alfred Feth. At that rate, $1,000 in a TFSA will double to $2,000 in 12 years. But if you have high-interest credit card or mortgage debt,TFSAs can wait until the debt is paid off.

Develop new life skills Jenni Thompson, 27, spent much of 2011 unemployed and despondent. Then, on her father’s advice, she hired life coach Caird Urquhart of Newroad Coaching in Toronto to get her journalism career back on track. “Not being able to find a job for so long hurt my self-confidence,” Thompson says. “My life coach gave me the focus I needed to follow up on potential job leads. She didn’t let me give up on myself.” It worked. After investing in about $1,000 worth of weekly life coaching sessions, Thompson landed her dream job as a social media editor at a local newspaper. She says investing in herself and her career was the best thing she could have done with the money. “It’s paid me back many times over by giving me a good salary and benefits, and some great career experience.” Others have also used extra cash to learn new life skills. Take U.J. Ramdas of Toronto. Every year, the self-employed therapist invests $1,000 of his tax refund in himself. This year he’s doing two things: upgrading his life-saving skills by taking first aid courses and signing up for an intensive meditation course at the Vipassana Centre in Toronto. “These investments in myself maximize my value as a human being,” Ramdas says. “It makes me a better person and I’m just happier.” Amanda Mills, a financial therapist with Loose Change in Toronto, fully supports this idea. “Take a pottery class, travel, join a biking club,” says Mills. “These are all things that will inspire you to do great things. That’s priceless.” So what did Amanda do when she recently came into $1,000? “I bought an old, used upright piano,” Mills confesses with a laugh. “I played the piano as a teenager and having one in my apartment now that I’m older brings me more joy than I can describe.” Reward yourself Treat yourself to a relaxing four-night Caribbean cruise with Celebrity Cruises ($399 per person, which includes a cabin with a balcony). Sunny Cozumel, Key West and Miami are ports of call. About $1,000 per person with airfare. For $25 an hour, hire a maid Saturday mornings so you can do Yoga, take a piano lesson or do some birdwatching. You’ll feel energized.