Got an extra $1,000 sitting still? Here are the 4 recommendations financial advisers say you should do with it

So, what’s the smartest way to use a $1,000 windfall? Seven financial advisers weigh in on your best possible move.

The basics: Open an emergency fund or pay down high-interest debt

Many financial advisers recommended starting or building an emergency savings fund (1).

“Ideally this should be between six and 12 months of core living expenses,” says Flavio Landivar, a certified financial planner (CFP) at Evensky & Katz Wealth Management. He recommends keeping the money in a high-interest savings account (HISA), where it can earn a higher interest rate than in a traditional savings or chequing account (2).

In Canada, HISAs are widely available through major banks and online-only institutions. Rates vary — typically between 3% and 5% annually depending on the institution and current Bank of Canada rate. Some promotional rates can reach up to 4.5% and 5%, depending on the same conditions (3).

Some experts say it’s acceptable to keep as little as three months of necessary expenses in an emergency fund (4). If you’re part of a two-income household, you might have a little more leeway in how much you set aside. Everyone’s situation is different.

Many financial advisers also recommend using that $1,000 to pay down any high-interest debt, a strategy that’s part of the snowball debt repayment method (5).

Debt is considered “high-interest” if it carries an annual percentage rate (APR) of 8% or higher (6). In Canada, this can include credit card debt — where rates can range from 19.99% to as high as 29.99% — as well as any personal loans you took on when your credit score was lower. Or maybe a payday loan was in order when you found yourself in a pinch. Payday loans can charge anywhere from 391% APR to over 650% APR, making the overall cost of the loan exorbitant (7).

Generally, lenders typically charge higher rates to borrowers with weaker financial profiles.

If you carry any of these types of debt, prioritize paying them off before tackling lower-interest obligations. Doing so can make a serious dent in what you owe, save money on long-term interest charges and even improve your credit score.

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Put the money into a retirement account and invest it

Maybe you already have the basics covered — a full emergency fund and no high-interest debt. Next, ask yourself: Do you have a retirement savings account? If not, opening one and depositing the $1,000 into it is a natural next step.

In Canada, the two most common registered retirement accounts are the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). Both offer tax advantages, though they work differently.

Contributions to an RRSP reduce your taxable income for the year, and withdrawals you take in retirement are taxed as income. The TFSA, by contrast, is funded with after-tax dollars — but all growth and withdrawals are completely tax-free.

Check whether your employer offers a group RRSP or a Defined Contribution Pension Plan (DCPP). Some employers match a percentage of what you contribute, up to a specific amount — essentially free money that can dramatically accelerate your savings growth (8).

So, how should you invest that $1,000 once it’s in a registered account?

“I’d just put it into a broad index fund and get it invested — no need to overthink it,” says Joon Um, a certified financial planner in Beverly Hills (9).

Nick Covyeau, a CFP and founder of Swell Financial, agrees that equities are a good starting point. “There is no one-size-fits-all approach, but I’d emphasize — on the equity side — investing in quality companies with strong brands, essential products and manageable debt,” he says. “These businesses tend to be more resilient, regardless of the inflation environment (10).”

In Canada, low-cost index funds and exchange-traded funds (ETFs) that track broad market benchmarks — such as the S&P/TSX Composite Index or a global index — are a widely recommended option for both new and experienced investors.

Consider lower-risk investments

Do you have a lower risk tolerance when it comes to investing? Then fixed-rate investments — such as bonds or Guaranteed Investment Certificates (GICs) — may be more to your liking than stocks.

These are also good options if you’ve already invested in the stock market but are looking for safer alternatives to diversify your portfolio.

“If it is for short-term needs, put it in cash, bonds or a CD,” says Nicholas Bunio, a CFP at Retirement Wealth Advisors. “Regardless of market values or inflation, sudden shocks can and will happen to the world (11).”

GICs are the Canadian equivalent of U.S. certificates of deposit (CDs), and are available through Canadian banks, trust companies and credit unions. They offer a guaranteed rate of return for a fixed term — typically ranging from 30 days to five years — and are eligible for Canada Deposit Insurance Corporation (CDIC) coverage on eligible deposits up to $100,000 per depositor, per insured category (12).