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 5,000 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.
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.
Our Fundrise review details how it is the only investment of this kind where you can get started with only a $500 investment, most REITs require you to be an accredited investor with a minimum of $1 million in investments.
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.
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.
You can invest in LendingClub 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.
Get started with LendingClub>>
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.
ETF’s take this hurdle out of the way and allow you to invest directly. My favorite online brokerage firm for ETFs is M1 Finanace.
This is because M1 Finance has over 2,000 ETFs that you can invest in commission free. That is much less than other platforms who can charge as much as $10 a trade.
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.
You can purchase mutual funds through any brokerage or directly through the fund itself. The most popular discount brokerages for mutual fund investing are:
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.
Typically less expensive to enter than mutual funds, you can buy into the most index funds with these brokerage accounts:
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 investing $1,000 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 M1 Finance that has over 3,000 stocks you can trade for FREE.
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, your top options are:
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.
If you are not confident in how you want to invest in this account, you can try Blooom. It is a robo-advisor that searches through all the options in your 401(k) or 403(b) and helps you get more from your investments.
And it is only $10 a month for all the services they provide.
Short Term Ways to Invest $5,000
If you need to have access to your money, but want to hedge a little against inflation, these short term investment 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 give you the same low risk investments and can give ten to 100 times the interest of a traditional bank.
I currently keep my emergency fund in a Capital One 360 account. I have been with them for a long time and they have great customer service. You can also check out other online savings accounts.
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.
While there are many top high interest CD accounts, one of the best banks for CD accounts right now is CIT bank. They even offer a no-penalty withdraw 11-month CD.
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 an investment of $2,000? 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 consumer 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. That is the most fruitful investment of $500 that I make.
- $1,000 to Savings Account – I am a big fan of having money ready for when there is a deal. Having a $1,000 investment in a Savings Account helps me be ready for the next investment.
- $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. While investing $1500 amounts to 30%, the diversification and management you get here makes it worth it.
- $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 M1 Finance.
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.
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