Investing

How to Invest $5k

Some of the best ways to invest $5k include stocks via a low-cost broker, ETFs via a robo-advisor, mutual funds, low-risk deposit accounts, and your retirement account.

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They say it takes money to make money but they never say how much. If you find yourself with some extra cash, you might be surprised to learn how little it takes to turn your savings into significant returns. While any investment amount is a good start, we like to be specific, so here’s everything you need to know about how to invest $5,000.

Overview: The Best Ways to Invest $50k

Investment TypeBest For
Low-cost stocksAffordable with potential for high returns
Robo advisorsFull-service investing advice and portfolio management
Mutual fundsLower risk, diversified portfolio
Debt reductionFreeing funds for future investment
Deposit accountsSafe, passive income
Retirement accountLong-term growth
Financial advisorHelp with growth

1. Find a Low-Cost Online Broker

Getting involved with the stock market is a smart move for new investors. Still, exorbitant trade fees, trading commissions, and high minimum deposits can make stocks inaccessible to the average person.

Luckily, there are many discount brokers and even apps designed with beginning investors in mind. These are perfect for investors with limited cash because they often don’t have minimum investment requirements or trade fees.

Of course, there is a more significant risk involved in trading stocks than some other investment options, especially if you handle your own accounts. That’s why it’s important to know what you’re doing if you decide to purchase stocks through a discount broker.

If you arent as familiar with the stock market as you could be, consider an online broker with a robust resource center like TD Ameritrade. This online broker is exceptionally user-friendly and charges $0 commissions on stock, ETF, and options trades.

You could also go with the Robinhood app for commission-free trading from your phone. Through this platform, you can invest in just about any company with fractional shares.

Low-cost brokerage accounts are self-directed, so they may not show you how to invest $5,000 wisely, but they will save you money.

2. Try a Robo Advisor

Robo advisors can be an alternative to traditional investment advisors and are often considered one step above discount online brokers.

Instead of connecting you with trained professionals, robo advisors use algorithms to advise your investments. Instead of selling you stocks and leaving you to manage them yourself, these digital platforms provide automated financial planning services and portfolio management.

Robo advisors can handle many different types of investments, but user portfolios often include exchange-traded funds (ETFs).

A robo advisor looks at your assets and what you want to accomplish through investing and uses this information to plan and carry out investments for you. But a good robo advisor will show you how to invest $5,000 and educate you about why these investments make sense.

Betterment was the first robo advisor to hit the scene back in 2008 and is still considered one of the best. The platform is intuitive, comprehensive, and you don’t have to know anything about investing to start. The account minimum is just $10, and the annual fee starts at 0.25%.

Wealthfront is another reliable robo advisor to consider. This software-only platform also charges an annual fee of just 0.25%, but the account minimum is $500. Once your account is funded, Wealthfront will automatically invest your cash across 11 global asset classes of low-cost ETFs.

3. Think About Mutual Funds

Mutual funds are an excellent way to get more from your money. With a mutual fund, you team up with other investors to invest in a portfolio of securities hand-selected by a highly qualified money manager.

This model allows you to diversify your new portfolio while lowering your risk. A $5,000 investment is more than enough to become a part of a mutual fund.

If you’re a beginner, we highly recommend using a brokerage to invest in mutual funds. That way, you don’t have to know how to invest $5,000, a professional can do it for you.

Ally Invest is the investing service offered by Ally Bank. The company offers commission-free trading for stocks, bonds, ETFs, and mutual funds, making it a good choice for cost-conscious investors. If you want to be hands-off, there’s also a managed-portfolio service with a $100 investment minimum.

According to Goldman Sachs, the average large-cap index fund will see a return of 6% over the next 10 years, and U.S. equities will see a return of 8%.

The Vanguard Total Stock Market Index Fund (VTSMX) is a strong choice for beginning investors. It leverages the entire U.S. equity market to provide investors with broad diversification. The VTSMX is predicted to see a 10-year return of 13.48%. A minimum investment of $3,000 is required.

The Fidelity ZERO Total Market Index Fund is also worth exploring. This fund projects an impressive annual return rate of 14.72% in the next year and doesn’t require a minimum investment. The FZROX fund is perfect for beginning investors thanks to its low trading expenses and varied portfolio.

4. Reduce Your Debt

Investing isn’t all stocks and bonds. Before you start thinking about investing $5,000 into traditional investment accounts, think about how you can free up cash by reducing your monthly obligations. This option can leave you with more money to invest in the future.

How much of your paycheck do you see each month? How much of your money goes toward credit cards, student loans, and other debts? The best thing you could do with your extra cash may be to put it toward your debt.

The Tally app at meettally.com is a popular choice for organizing credit card debt. This fee-free financial app is designed to help users pay off credit card debt faster through prioritization and planning. It consolidates your debts into a single line of credit and then pays off your credit cards for you.

If you could use help designing a repayment plan for your debts, try Unbury.me. This free software will optimize a plan for you to decrease the amount of interest you pay over the life of each loan.

Related: Good Debt vs Bad Debt

5. Consider Low-Risk Deposit Accounts

When you start wondering how to invest $5,000, you probably initially set your sights on top-dollar investments such as venture capital and international stocks. While these have the potential for high returns, they also come with a higher risk level.

That’s why you should consider low-risk, interest-bearing deposit accounts. Though not as flashy and alluring as other investment vehicles, industry insiders agree that these accounts are easy money.

High-yield savings accounts, certificates of deposit (CDs), and money market accounts (MMAs) are some of the best investments you can make. Why? Because they keep your money relatively close, and they’re incredibly safe. Online versions of these accounts generally offer the highest annual percentage yields (APYs).

High-yield online savings accounts like Chime not only pay interest on the money you save but make it easier to put away more cash. This account pays a 0.50% Annual Percentage Yield (APY) 1- 8x2 the national average! There is no monthly fee or minimum required balance, and you can use Round-Ups and Save When I Get Paid features to save automatically.

Chime SpotMe® Disclosure - Eligibility requirements and overdraft limits apply. 

Chime Disclosure - Chime is a financial technology company, not a bank. Banking services and debit card provided by The Bancorp Bank or Stride Bank, N.A.; Members FDIC.

1Chime cannot guarantee when files are sent by the IRS and funds can be made available.

^Early access to direct deposit funds depends on payer 

Chime APY Disclosure - 1The Annual Percentage Yield (“APY”) for the Chime Savings Account is variable and may change at any time. The disclosed APY is effective as of November 1, 2021. No minimum balance required. Must have $0.01 in savings to earn interest. 2The average national savings account interest rate of 0.06% is determined by FDIC as of November 1, 2021 based on a simple average of rates paid (uses annual percentage yield) by all insured depository institutions and branches for which data are available. Visit https://www.fdic.gov/regulations/resources/rates/ to learn more.

My personal favorite savings account offer currently comes from Citi and their Citi Accelerate Savings account. The current APY on the account is 0.50% and if you’re in need of bonus cash, you’ll want to consider a Citi Priority Account which offers up to $1,500 bonus when you open an eligible checking account (after meeting certain balance and deposit requirements). Keep in mind, you cannot use a Citi Accelerate Savings Account or a Citi Savings Account to maintain your Balance as part of this offer and still be eligible to earn the Bonus for Citi Priority.

Related: Best Online Savings Accounts with High Interest

Depending on the economy at the time you’re opening an account, you will generally be able to score a rate much higher than what savings accounts can offer with a CD. However, currently, high-yield savings accounts are a smarter investment.

Shop around when it’s time to open a high-yield deposit account and choose the bank with the most competitive rate.

Deal of the Day: Chase is now offering a $225 cash bonus when opening a Total Checking® Account. No minimum deposit and all deposits are FDIC insured up to the $250,000 per depositor maximum. Learn More

6. Fund a Retirement Account

It’s never too early to start thinking about your retirement.

According to Investopedia, the average person should plan to retire on approximately 80% of their current annual income. While it’s possible to live on less, 80% will allow you to live comfortably without sacrificing the lifestyle you’re accustomed to.

With that in mind, think about where your money will come from after you’ve retired. If you’re smart, a good chunk of it will come from investments.

Thinking about how to invest $5,000 may not seem important now, but this money could form the foundation of your retirement nest egg. A Roth IRA and a 401(k) are two of the most popular types of tax-advantaged retirement accounts, which are investments in and of themselves.

A 401(k) is employer-sponsored. You likely won’t get to choose your plan provider, but you will be able to choose your investments (often from mutual funds, ETFs, stocks, and so on) and risk tolerance. You also decide how much to contribute. Money withdrawn from a 401(k) is taxed, but contributions are not.

If your employer offers a decent contribution match such as 50%, a 401(k) could be an excellent way to invest in products you already want to invest in with more money than you started with.

A Roth IRA is not sponsored by an employer. You open a Roth IRA on your own through an investment firm. This option gives you a considerably higher level of control and freedom. You invest your income after it has been taxed and are not required to pay taxes on withdrawn funds from a Roth IRA.

Charles Schwab is one of the best Roth IRA brokers. There’s no account minimum, so $5,000 is plenty to start with, and you can choose from thousands of 0-commission and fee-free stocks, funds, and ETFs. You’ll also receive 24/7 professional guidance and can trade from your phone.

A Roth IRA with Merrill Edge is another excellent option. Again, there are no account minimum or trade fees. There are not quite as many securities to choose from with this account, but the customer service and trading platform are above average.

You can also make sure you’re doing the best you can with your employer-sponsored account with a service like blooom, which helps you manage your 401(k) plan to ensure you’re getting the most bang for your buck.

Related: blooom Review - Finally, a Robo-Advisor for Your 401(k)

7. Seek a Financial Advisor

Before diving into investing, you need to come up with a long-term plan for your money. You may just have $5,000 now, but once that money starts to grow, you’ll need a strategy. A financial advisor can help put you on an investment track that will meet your goals.

An advisor will ask you what you’re saving for and how much you have put away. They’ll consider your age and income as well. With this information, they’ll help you determine what you should invest in and assess your risk tolerance.

SmartAsset, a financial technology company, can connect you with a financial advisor based on your priorities. It looks at everything you want out of retirement and connects you with the best pre-screened planners in your area, all for free.

For advice targeted toward general investing, try Paladin. Its free service will also match you with three highly-qualified SEC-registered financial fiduciaries in your area, and you can take your pick.

The bottom line? A great financial advisor will tell you exactly how to invest $5,000 to maximize your return without taking risks you aren’t comfortable handling.

Learn More: The Best Online Financial Advisors

8. Invest in Cryptocurrency

It’s a common misconception that you need tens of thousands of dollars to invest in cryptocurrency. In today’s world thanks in large part to online cryptocurrency investing platforms, anyone can invest.

For example, Coinbase is an online platform that makes it easy for anyone including beginners to buy, sell, and manage cryptocurrency.

Consider this:

  • Coinbase has more than 56 million verified users
  • Coinbase supports investors in more than 100 countries
  • Quarterly volume trading of approximately $335 billion

Not only does that show you just how powerful Coinbase is, but it also lends a better idea of the increased popularity of investing in cryptocurrency.

From Bitcoin to Ethereum to Litecoin, there are hundreds of cryptocurrencies to invest in. It’s a great addition to any portfolio, just make sure you proceed with caution. As a general rule of thumb, cryptocurrency shouldn’t make up more than 5 to 10 percent of your investment portfolio.

What’s the Best Way to Invest $5,000?

That’s the $5,000 question, isn’t it? Unfortunately, there is no best way to invest $5,000 because there is no such thing as a standard investor. The best way for you to invest $5,000 will depend on several factors, including:

  • When you plan to retire
  • Whether you have a family or plan to start a family
  • How long you can invest the money
  • How much debt you have

Ultimately, the best answer to this question is not all in one place. Keep your portfolio diversified and always think about your current and future financial needs.

Related: How and Why to Diversify Your Investments Portfolio - Guide

For example, if you have children, it might be wise to contribute to a 529 plan to save for their college. If your family requires a lot of medical care, opening a tax-deductible health savings account might be ideal.

Related: The Complete Guide to the Best 529 Plans

Can I Invest $5,000 in Real Estate?

If you know anything about investing, you probably know that real estate is generally an excellent investment that provides steady passive income. Given that, you might be wondering how to invest $5,000 in real estate.

Many real estate investors use something called the 1% rule to decide whether a property is worth investing in. This rule dictates that the gross monthly rent should equal at least 1% of the property’s sale price. For example, a $150,000 building should rent for at least $150.

If a property can’t feasibly earn at least 1% a month, then it is probably not worth investing in but if it can, it can bring in 12% of the purchase price annually in gross revenue and 6 to 8% in net income. Most investors would consider that a good return.

There is more than one way to invest in real estate there are quite a few, actually. For example, you can use a real estate investing platform like Fundrise or rent out your property. You could save up for a down payment on a new property or join a real estate investment group.

There is no shortage of resources available to learn how to get involved in real estate investing and even invest $5,000 in real estate more specifically.

Related: Beginner’s Guide to Real Estate Investing

How Do I Invest $5,000 in the Stock Market?

A $5,000 investment is plenty to get started with stock market investing, but you might not want to invest everything you have. Most experts advise against pouring 100% of your investable cash into the stock market.

Instead, a good rule of thumb is to subtract your age from 100 to get the percentage of your investment portfolio that should be in stocks. For instance, if you’re 26 now, 74% of your assets is a good starting point regarding how much to allocate to the stock market. The other 26%? Bonds.

Of course, there is more to investing than this simple equation, and that’s why it’s vital to get expert advice on how to invest $5,000, whether you’re buying stocks or not.

Resource: How to Invest in the Stock Market: A Guide

You want to buy stock within asset classes that have proven to be promising.

You could invest in the S&P 500, but this has not been the top-performing index for quite some time. You may be better off going a less traditional route. For example, fine art has outperformed the S&P 500 by more than 250% in recent years.

If you want to invest in blue-chip art, invest through Masterworks. This platform makes a promising asset class accessible to beginning investors with low minimums and fees. Get started with just a few thousand dollars and watch your investments appreciate as they age.

Related: How to Invest in Art

Bottom Line

As you can see, $5,000 is plenty of capital to begin investing. All you need is a clear plan and a goal for your money. Wise investments will impact your life for years to come, so deciding how to invest $5,000 is all about thinking ahead to the next 5, 10, and 50 years.

What will your $5,000 do for you?

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