Money

What young people would do with an extra $1,000—and what experts say they should actually do

New research from Charles Schwab, which surveyed 2,000 young Americans aged 16 to 25, suggests that young people may be too optimistic about their financial future and may not yet fully understand some important financial concepts.

"Our personal responsibility for financial management has increased dramatically, but our basic understanding of our finances has lagged behind," says Carrie Schwab-Pomerantz, board chair and president of the Charles Schwab Foundation.

To see how young people would handle a small cash windfall, Charles Schwab asked survey respondents: If you instantly had an extra $1,000 that you could do whatever you want with, what would you do with it?

Here's what they had to say:

The most popular response was to send it straight to savings, which is a smart choice. As Charles Schwab points out, though, the majority of young people, 51 percent, "say they currently have some sort of debt, but only 3 percent would pay down that debt if given an extra $1,000."

If you're among the majority and have some form of debt — student loans, car loans or credit card debt — a small cash windfall can be a great way to get out of the red more quickly. Especially if the interest rate on your debt is high, getting rid of your loans as fast as possible will help you avoid paying thousands of dollars of interest.

Here are three other smart things to do with an extra $1,000, according to New York Times-bestselling author and co-founder of AE Wealth Management David Bach.

1. Build your rainy day fund

If you don't have at least six months worth of living expenses set aside, build up your emergency fund, Bach tells CNBC Make It.

Life doesn't always go as planned — you could lose your job, have a medical emergency or deal with a car breaking down — and it's important to give yourself a safety net.

As for where to keep that fund, there are a few good ways to boost the returns of your savings while knowing you can access your money pretty quickly if you need it. Try a high-yield online savings account. Or, Bach suggests, "put it in a money market account that pays reasonable interest. A money market account is one of the simplest and most secure alternatives around for anyone who wants to put aside some cash and earn a reasonable return on it."

2. Up your retirement contributions

The more you can set aside in your employer sponsored retirement account, if you have access to one, the better. Increase your 401(k) contributions "by at least 2 percent," says Bach.

A 401(k) is an effective savings vehicle for a few reasons: It offers large tax advantages, the money is automatically taken from your paycheck before you have the chance to spend it and, often, companies offer a match, which is essentially free money.

Not all companies offer a 401(k) plan. If that's the case for you, there are other accounts designed specifically for retirement, such as a Roth IRA or a traditional IRA. Use your windfall to open a retirement account or add to an existing one.

3. Open a "dream account"

Think about something exciting or meaningful you want to do between now and retirement, like traveling outside of the country, going to the Super Bowl or enrolling in grad school.

Then use your extra savings to "open up an investment account specifically for that dream," says Bach, and commit to adding to it on a consistent basis. Having a goal will make saving easier and more rewarding.

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