Having $5000 to invest puts in you a place where you have many more options than someone who is starting out by investing 1000 dollars or less.
To make this apply directly to your situation, I have broken this down into long term, short term and alternative ways to invest your money.
It is a great thing to get going with investing 5000 dollars, so take your time and find the mix of investments that works best for you.
How to Invest 5000 Dollars in Long-Term Investments
I define long term investing as any investment that is going to be for five years or more. These investments are going to give you the best gains because you can invest with a little more risk, knowing you have time to make up for any losses.
Peer to Peer Lending
I have become a big fan of peer to peer lending.
I not only like the diversification away from stocks that it provides, but I like the idea business people investing the money and be able to pay back these loans.
Currently I use Lending Club as my main platform for P2P lending. The interface is easy to use and understand and their ratings system makes it simple to know what your expected rate of return will be.
You can invest with as little as $25 in a single loan. I started out by investing $250 and buying into 10 different loans. That way if one loan defaults, you have all the others to make up the difference.
If you are not comfortable doing your own trading in the stock market then a Robo-Advisor is a great way to go.
When I signed up with Betterment, all I had to do is ask a series of questions that were there to determine my risk tolerance and fund my account. After that, the system does everything for you.
This is a great hands-off approach to investing and is gaining in popularity as more people find out about it. If you are looking for more details I did a full Betterment investing review.
FundRise allows you to invest in real estate without having to actually own the property. The way it works is you buy into their real estate investment trust (REIT) that money is then pooled with many other investors and then the manager of the trust goes out and make real estate investments.
It is a great way to diversify into real estate without actually having to do any of the management yourself. Fundrise is also the only investment of this kind where you can get started for only $500, most require you to be an accredited investor with a minimum of $1 million in investments.
ETF stands for “Exchange Traded Fund”. This is a fancy way of saying mutual funds that are traded like stocks.
The advantage to an ETF is that you can buy much smaller pieces of a mutual fund than it costs for you to buy directly into the fund. For example, when I first bought into my vanguard funds, I had to invest $3,000 just to get in. Other funds will require you to invest your entire $5,000 or more to get started.
ETF’s take this hurdle out of the way and allow you to invest directly. My favorite online brokerage firm for ETFs is TD Ameritrade. This is because they have over 100 ETFs that you can invest in commission free. So you save at least $5 a trade over other platforms. That $5 adds up over time when you consider compound interest.
Actively Managed Mutual Funds
I am a big fan of mutual funds because it allows you to invest in a whole bunch of stocks at one time. They are also managed by professionals so I don’t have to do as much research. I can simply see how the fund has done over the last five, ten or even 50 years.
If they have a good track record and good fund management, then it is worth investing in. If not then move on, because there are a TON of mutual funds out there.
You can purchase mutual funds through any brokerage or directly through the fund itself.
Index funds work like an actively managed mutual fund but are pegged to a specific index instead of a person or computer picking the stocks.
The most famous index is the S&P 500, but there are others that include many more stocks in them. You can even purchase a fund that invests in the entire stock market.
If you fancy yourself good at evaluating businesses, then you may want to look at purchasing individual stocks instead of leaving the decisions up to others. The learning curve can be a little steep to make consistently good picks, but the upside is high.
If you are new to purchasing individual stocks then I would only start out with 20% of my 5000 dollar investment, just to make sure I don’t lose it all picking the wrong stocks.
You will get the lowest fees uses a brokerage like Ally Invest that only charges $4.95 a trade.
Invest in a Retirement Plan
All the above investments include the fact that you have to pay taxes on your gains. If you do not need the money until retirement try one of these options to avoid getting taxed.
The Roth IRA is my favorite retirement plan. This is because the money goes in after your income taxes have been taken out and grows tax free. When you withdraw the money at retirement, you do not pay any additional taxes on the money.
This is a great way to put away money for retirement. If you are looking for a place with low fees to open a Roth account, I would use Ally Invest or TD Ameritrade. Both have really low trading fees and, like I said above, TD Ameritrade offers all those commission free ETFs.
Employer offered Plans like a 401K
If you have a retirement plan offered by your employer, and they offer matching funds, then you are crazy if you are not invest into that account. Not only does the money come out pre-tax, your company matches the funds so you are getting an instant return on investment.
Most companies calculate this in as a part of your compensation, so if you are not taking advantage of matching retirement funds you are not getting your full pay.
Short Term Ways to Invest 5000 Dollars
If you need to have access to your money, but want to hedge a little against inflation then these options are going to give you the best rates.
High Yield Savings
Bricks and mortar banks are very convenient for customer service, but they give you TERRIBLE interest rates. Online banks are still pretty easy to work with and can give ten to 100 times the interest of a traditional bank.
Certificates of Deposits
A Certificate of deposit, or CD for short, works just like a savings account but you lock in your money for a specific period of time. The longer you lock in that money the better your interest rate is going to be. With the low interest rate environment CDs are not getting much better rates than the high interest savings accounts, but you can check the banks in my list of best high interest CD accounts.
Best Alternative Ways to Invest $5000
And then there are the ways to invest that do not seem like an investment, but pay off big time in the long run.
My family gives 10% of what we make to our local church and we also give to other causes we believe in. Giving to charity is an investment in something bigger than yourself and it not only makes the word a better place but, I find, it makes me a better person.
Maybe you want to change jobs, but need a new certification or maybe you have a great side business idea. Whatever the opportunity, investing in your knowledge or in an opportunity that opens up your potential is a great investment.
If you do not have an emergency fund then you are setting yourself up for problems later on down the road. When we do not have any margin in our finances we will eventually turn to debt when an emergency comes up.
Make sure that you have at least $1000 in a beginner emergency fund before investing in anything else.
Pay Off Debt
If you have a lot of high interest debt then you can guarantee that you will get a great rate of return on your investment by paying that debt off. Imagine if you have a credit card that has a balance of $2,000 and an interest rate of 21%. Is there anywhere that you can get that kind of return on your money? If you are still thinking about this I will tell you that the answer is NO!!!
So pay off that high interest debt and start enjoying not having those payments every month. In fact you can take your new cash flow and start investing monthly instead of a $5,000 lump sum investment.
How I Would Invest 5k Dollars
I am a big fan of planning before you have to make a decision and that is why I love running these scenarios. First, let’s set a baseline for where we are financially.
The assumptions I am making for investing my $5,000 is that I already have an emergency fund in place and I do not have any debt. Finally, I already have a plan that is running to max out my Roth IRA this year. So I am really just figuring out the best way to invest 5000 dollars, on top of my normal retirement investing. Here we go!
- $500 to Charity – Like I said above, the first 10% of any money we make goes to charity.
- $1,000 to Lending Club – I am a big fan of lending club and have personally averaged over 8% in this alternative investment for a long time. A $1,000 investment in LendingClub is definitely worth it to me.
- $1,000 to Fundrise – I am just about to make my first investment in Fundrise and am really excited over this diversification play.
- $1,500 to Betterment – There isn’t much to complain about hands off investing.
- $1,000 to ETFs – I love the idea of purchase mutual fund like stock and I would definitely buy one of the commission free ETFs with TD Ameritrade.
With any type of investing the most important thing you can do is get started right now. Not matter if you choose something extremely safe like a savings account, with moderate risk like peer to peer lending, or very risky like picking your own stocks, if you do not start now that money is just sitting around and not working for you.