If you are ready to invest $5000, you are in a great position to start making smart financial moves.
With the knowledge and resources available on Millennial Money, you can make informed decisions about your investment options and retirement planning.
Before you know it, your diversified portfolio will have you on the path to financial freedom.
Let’s dig into the best ways to invest $5000 and the steps you should take to get rolling.
10 Ways You Can Invest $5,000
Here are the best ways to invest $5000 dollars:
- Plan for Your Retirement with a Roth IRA
- Use a Robo-Advisor
- Buy Commission-Free ETFs and Mutual Funds
- Invest in High-Paying Dividend Stocks
- Invest in Low-Risk Bonds
- Consider Real Estate Investments
- Fund a 529 Plan
- Open a CD or High-Yield Savings Account
- Diversify with Alternative Investments
- Invest in Yourself
1. Plan for Your Retirement with a Roth IRA
Number one on the list for investing $5,000 is to start retirement savings with a Roth IRA.
A Roth IRA is an individual retirement account that offers several tax benefits that can help you easily save for retirement.
Contributions to your Roth IRA account are made with after-tax dollars, meaning you’ve already paid income tax on the funds you’re adding to the account, and your Roth IRA account will grow tax-free.
When it’s time for a withdrawal, it will also be tax-free, as long as you’ve had the account open for at least five years and you are withdrawing after age 59 ½. Unlike a traditional IRA, you can withdraw your contributions anytime without taxes or penalties.
A Roth IRA is one of the best ways to invest for retirement, especially if you anticipate that you’re in a lower tax bracket now than you’ll be in retirement.
With a 401(k), you can contribute pre-tax dollars from your paycheck and invest in a range of stocks, bonds, and mutual funds. Like the Roth IRA, there are tax benefits. Since contributions are made pre-tax, your earnings are tax-deferred until you withdraw them.
Many employers will match your contributions to a certain percentage, which is free money for you. Take advantage of it!
2. Use a Robo-Advisor
Robo-advisors are excellent options for investors who prefer a passive approach to investing. They are online financial advisors that use computer algorithms to select and manage your investment portfolio.
Robo-advisors usually diversify your investments with different assets, including exchange-traded funds (ETFs), stocks, bonds, and real estate. However, its decisions are mostly based on your individual goals and preferences.
Many brokerage platforms, such as Vanguard offer free robo-advisor accounts and manage and track your investments without a ton of fees.
This strategy is ideal for new investors or those who need more knowledge or time to manage their investments. With a robo-advisor, you can get started quickly and easily, with minimal effort.
Similarly, you could open a free self-directed account with M1 Finance to build your investment portfolio without having to execute trades yourself.
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3. Buy Commission-Free ETFs and Mutual Funds
When building wealth, you always want to add diversification to your portfolio to help reduce your risks. One way to do this is by investing in an ETF (exchange-traded fund) or mutual fund.
Mutual funds and ETFs allow you to invest in a collection of securities, like stocks, bonds, or commodities, that follow a specific index (like the S&P 500) or have a common theme.
ETFs are traded on the stock market and can be bought and sold throughout the trading day. Investors benefit from low expense ratios and lower fees, as they are often passively managed. They may offer better returns than buying individual stocks. Because your investment is in multiple securities, even if one underperforms, you can fall back on the others.
With mutual funds, you pool your money with other investors to buy a diversified portfolio of stocks, bonds, or other securities. Instead of purchasing individual stocks or bonds, you’re buying a basket of securities that a professional fund broker manages for you.
The mutual fund manager’s goal is to generate a higher return than a particular stock market index fund, which invests in assets part of a specific index. A well-known index fund is the S&P 500, which consists of 500 of the most prominent American companies with an average annual return of 10.31%.
Both are versatile tools to diversify your portfolio and reduce your risk since they provide broad exposure to different markets, which minimizes your risk. Additionally, they offer lower fees and typically have better returns than individual stocks.
Before opening an investment account, check that your investment platform supports both investments.
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4. Invest $5000 in High-Yield Dividend Stocks
Adding high-paying dividend stocks to your investment account can be a rewarding, passive way to increase your portfolio’s profitability.
When you invest in a high-yield dividend stock, you are purchasing a stock that offers a consistent dividend payment to its shareholders, usually paid out quarterly. Dividend stocks tend to be less volatile and, of course, pay out more than traditional stocks.
You will receive a steady income stream with dividend stocks, even if the stock price fluctuates. A great benefit is that you can reinvest your dividend payments to buy more shares and increase your income over time.
High-yield dividend stocks are an excellent way to diversify an investment portfolio and generate steady income over the long term.
5. Invest $5000 in Low-Risk Bonds
If you want to protect your money from stock market volatility, consider investing in treasury or low-risk bonds. When you invest in a bond, you’re essentially loaning money to an organization or government entity, and in return, they will pay you periodic interest payments.
As a bondholder, you will receive interest payments until the bond matures. At that point, the organization is responsible for repaying your initial investment.
Bonds are considered low-risk because there is less volatility, predictable returns, and a steady income stream, making them ideal for conservative investors.
With treasury or low-risk bonds, you’ll have a steady, consistent return on your investment over time. Bonds can offer you a balanced portfolio while protecting your money.
6. Consider Real Estate Investments
Whether you’re a new investor or a seasoned real estate mogul, there are a number of ways you can benefit from real estate investing.
REITs are like mutual funds for real estate, as you pool your money with other investors to buy a portfolio of properties. REITs own, operate, and finance real estate properties and pass the earnings on to shareholders as dividends.
When you invest in a REIT, you own a small piece of real estate without the hassle of having to buy a property yourself.
With real estate crowdfunding, investors also pool their money to invest in individual properties or development projects. Once you’ve funded a crowdfunding account, like Fundrise, you can own a fractional piece of property or a project, and receive a portion of the rental income it generates.
You can choose your own investments and earn potentially higher returns than investments in the stock market.
7. Fund a 529 Plan
If you have children and anticipate they’ll want to go to college, contributing to a 529 plan is a smart way to invest in their future.
A 529 plan is a tax-advantaged savings plan that allows money to be invested on behalf of a child or other beneficiary. It grows tax-deferred and can be withdrawn tax-free when it’s used to pay for college tuition or higher-ed expenses at any accredited U.S. college or university. (Withdrawals for other qualified expenses are subject to federal income tax and possibly also state income tax).
Several states offer tax incentives for contributions to 529 plans, so check if you’re eligible for these additional savings.
8. Diversify with Alternative Investments
To further add diversification to your portfolio, consider alternative investments, or those that are significantly less affected by the volatility of the stock market (although not completely immune to market conditions or economic changes).
Alternative investments have the potential for sizable returns, with the added benefit of owning a tangible asset.
Common alternative investments include:
- Fine art
- Hedge funds
- Precious metals
- Real estate
- Venture capital
Rising in popularity in recent years has been cryptocurrency investments. When you purchase crypto, you are buying tokens of a specific digital currency, such as Bitcoin or Ethereum, with the expectation that its value will increase over time.
Crypto is stored on the blockchain or a large, public ledger that tracks all transactions made with a specific cryptocurrency. You can purchase cryptocurrency through various exchanges, such as Coinbase or Kraken, and brokerage accounts, like Schwab and Robinhood.
Cryptocurrency is quite volatile, with certain currencies fluctuating drastically and unpredictably. But, like any investment, when there’s the chance for great losses, there’s also the chance for great gains.
9. Open a CD or High-Yield Savings Account
Opening a certificate of deposit (CD) or high-yield savings account (HYSA) are two easy, straightforward ways to save money and guarantee growth. You can easily open either of these accounts at a local bank or credit union.
Certificate of Deposit
A CD is a savings account with a fixed interest rate over a set period, meaning your money will earn according to that rate. To open a CD for your $5,000, you’ll need to decide the term length of your CD, which can range anywhere from three months to five years.
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High-Yield Savings Account
With an HYSA, there may be a minimum deposit to open an account, but some banks may offer higher interest rates depending on how much you deposit.
However, the average annual percentage yield (APY) is 3.00%. Once you open the account, you can make deposits and withdrawals as needed, but the more you save, the more interest you earn.
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CDs and HYSAs are beneficial, as you can save money in a secure and structured way, you’re getting a better interest rate than a traditional savings account, and your accounts are FDIC-insured.
10. Invest $5000 in Yourself
The final type of investment is to invest $5000 in yourself. It may sound cliché, but investing in yourself is a surefire way to guarantee a better future for yourself.
Whether it’s taking a class, attending a seminar, or hiring a career coach, using this money to learn a new skill or refresh an existing one is a gratifying way to invest in your future.
Investing in yourself not only allows you to learn new skills but it also builds confidence and helps you make better decisions that will have a lasting impact on your life.
What to Do Before You Invest $5000
If you want to start on the right foot, there are a few steps beginner investors should take before starting their investing journey.
If you take the time to work on these areas first, you’ll have a solid foundation on which to build, and you’ll be better prepared when it’s time to make the best investment decisions for your financial situation.
1. Define Your Financial Goals
Before you start investing, you should determine your financial goals. Depending on your age and financial situation, your investment goals could include saving for retirement, fueling a vacation fund, or reserving funds for your child’s college tuition.
You will need to know exactly where you want to go to create a plan to get there. So, it’s best to figure out your financial goals in advance so you can make the most of your investments.
Make sure the goals you set are realistic and attainable. Don’t say, “I want to have a bunch of money,” say, “I want to save an extra $10,000 a year to put toward retirement.” Setting realistic targets can help you plan and track your progress toward financial freedom.
2. Pay Off High-Interest Debt
Part of your investment preparation is ensuring that you are in good financial standing and, if not, taking the right steps to improve your overall financial health. One of the best ways to do this is to pay off your high-interest debts. One colossal offender when it comes to high-interest debts is credit cards, some of which have over 25-30% APRs.
Ditching credit card debt will reduce the amount of money you’re paying in interest, directly impacting your overall finances. Additionally, it can free up cash in your budget that you can now use to invest.
Not to mention that paying off high-interest debts will also reduce your financial stress with how much you’ve been obligated to pay every month. You’ll breathe easier when you’re debt free.
3. Build an Emergency Fund
Another layer of your personal finance foundation is your emergency fund. The fund should have three to six months of living expenses to help you cover unexpected costs that might arise, such as medical bills, car repairs, or if you lose your job.
An emergency fund will provide you with financial security and peace of mind, so you won’t have to dip into your investments if you face a financial burden. You’ll always be prepared for the unexpected.
4. Determine Your Investment Style
This is the most critical step of all, as knowing your investment style will guide every decision you make with your money.
First, you’ll want to decide on your time horizon, or the length of time you plan to hold your investments. You could have a 30-year time horizon for your retirement investments, and you could also have a 5-year time horizon if you’re saving for a down payment on a new home.
Next, you’ll want to determine your risk tolerance, or the level of risk you’re comfortable taking with your investments.
Typically, risk tolerance falls into one of the following categories:
- Conservative: Not interested in taking risks, conservative investors are focused on stability, security, and capital preservation above all else; typical investments tend to be low-risk, low-return investments like CDs and bonds.
- Moderate: A bit more willing to take risks, but not too much. Moderates invest in a combination of low-risk and high-risk investments—finding a comfortable balance between the two.
- Aggressive: Willing to take significantly more risks in pursuit of higher returns; aggressive investments include trading stocks, commodities, and alternative investments.
While any investment comes with a degree of risk, some are riskier than others. Knowing where you fall as an investor will allow you to choose investments aligned with your comfort level.
Once you’ve paid off your debts, grown your emergency fund, and defined your financial goals, time horizon, and risk tolerance level, you’ll be ready to take the leap into investing $5,000!
Investments You Should Avoid
While stocks do carry a degree of volatility, other investments can appear too good to be true. Either they carry too much risk or offer nominal returns—either way, you should avoid them.
It’s always advised for potential investors to do their due diligence and research the market before making any investments—that way, you can make the most informed decision.
Below are the investments it’s best to stay away from:
Penny stocks are traded for less than $5.00 per share. While these stocks can offer the potential for rapid growth with huge returns, they also carry a seriously high level of risk.
Many of these stocks are highly speculative and lack transparency and liquidity, making them a poor choice for investors. Additionally, penny stocks are often subject to market manipulation, as well as potential pump-and-dump schemes, or a scam to manipulate the price of a stock.
With pump-and-dump scams, false information or “hype” is spread about a stock to convince others to buy it. Once the stock price goes up, the scammers quickly sell—inevitably causing the price to crash, leaving everyone else suffering significant losses.
Is this always the case? No. But in my eyes, penny stocks aren’t worth the risk and should be avoided.
Gambling is a dangerous investment, and I don’t say that lightly. In the short term, it may seem like an exciting and hugely rewarding endeavor—but in the long term, it’s unstable, and depending on how much you’ve chosen to lay down, it could lead to a financial disaster.
Gambling is a game of luck, and the odds are often stacked against you. It’s also addictive, which can lead to life-changing losses over time.
If you live in one of the states that allow online gambling, it’s easy to load up your account by transferring funds directly from your bank account. It’s also easy to bet it all away. Don’t risk gambling away excessive amounts of your hard-earned money—hard pass.
“High-yield” is just a nicer term for what is primarily known as “junk bonds,” or bonds issued by companies with lower credit ratings. These bonds can pay higher yields than investment-grade bonds to compensate for the greater risk that the company will default.
While their high yields can be enticing, companies with poor credit scores (like people with poor credit scores) have a better chance of going bankrupt or defaulting. Investing in high-yield bonds of a company that is already hard up could lead to losing your entire investment.
Because the chances of losing out (rather than earning big) are much greater with junk bonds than investment-grade bonds, it’s best to avoid them. Or, if you are willing to take the risk, allocate only a small portion of your portfolio to these types of bonds.
Traditional Savings Accounts
While there is no harm in stashing your money in a traditional savings account, it will not grow there. Traditional savings accounts are usually low-yield and not suitable for long-term investments.
According to the Federal Deposit Insurance Corporation (FDIC), the average national interest rate for regular savings accounts each year is 0.33%. So, if you put your $5,000 into one of these accounts, you’ll earn $16.50 in interest in one year.
The interest you earn with these accounts is significantly lower than the other options listed above. Further, the inflation rate is usually higher than the interest you’re earning, so you’re actually losing money over time.
Stick with a high-yield savings account, CD, or money market if you want guaranteed growth for your money.
Frequently Asked Questions
What are the potential risks when you invest $5000 dollars?
Investing any amount of money can come with risks, and your investment of $5,000 is no exception. The greatest risk, and likely the biggest fear of any new investor, is the risk of losing your entire investment. However, this is the least likely outcome if you take the steps I’ve outlined here.
Additional risks include market volatility, not meeting expected returns, and investing in an asset that may not perform as well as you’d hoped.
It’s important to understand these risks and determine, before investing, exactly how much risk you’re willing to take on. While investing $5,000 can come with potential risks, it can also open you up to great rewards!
Are illiquid investments bad investments to make?
You don’t have to completely avoid illiquid assets (like real estate, collectibles, and artwork)—just be mindful that they can be challenging to convert into cash quickly. It could take months, maybe longer, to sell off illiquid assets for their actual value, so investors might not be able to access their money right when they need it.
If you’re in a situation where you need immediate funds and have to sell in a hurry, you could suffer losses by not getting your investment’s full value. You should also be aware that illiquid assets may not be properly valued in a given market and may not be priced appropriately.
If this type of investment entices you, you should seek financial advice and guidance from a finance professional before making any moves.
When is the best time for me to invest $5000?
Like the old adage—the best time to start was yesterday, and the next best time is now. It’s never been easier to open a brokerage account online and start investing, whether you have $5.00 or $5,000. If you’ve been putting it off, now is the time to take the necessary steps to get started and invest $5000!
How Should You Invest $5000?
Investing $5,000 is the best way to build your portfolio and increase your wealth over time. With the proper preparation, investment strategies, and research, you can find the right investment opportunities for you that will help you reach your financial goals.
Remember to take the proper steps to ensure you are in the best financial position before investing. Steer clear of super high-risk investments, like penny stocks and junk bonds, as they may leave you worse off than when you started.
Diversify your investments using a few options mentioned here, and most importantly, get started as soon as you can. The earlier you begin investing your money in a diversified portfolio, the more opportunities you’ll have to reap the benefits.
As always, if you think you would benefit from further guidance, it’s always beneficial to seek investment advice from a professional financial advisor.
Good luck—I’m rooting for you!