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Making the right investment decisions for your life is key to financial health. Learning how to invest $5,000 is a great first step toward staying on track with your plan and meeting your goals.
If you’ve steadily saved up $5,000 to invest, congratulations!
Now it’s time to learn what your choices are with how to best put your money to work for you. After all, if you start investing early, you can build your savings over the long-term, which has tremendous advantages.
When you have time on your side, you can use the power of compounding to grow your wealth exponentially, or with a snowball-like effect.
Below, we’ll review several popular ways beginners can learn how to invest $5,000. But first, you should give your finances an honest review and make sure the time is right to try to grow your money.
If you have $5,000 on hand, it’s possible that putting it toward getting on better financial footing, such as paying down debt or saving for your future, may be a better option.
So, let’s first start with what you need to know before you actually learn how to invest $5,000 to make money. Again, you first want to make sure you are financially secure.
Before Learning How to Invest $5,000
You need to consider three important parts of your financial life before investing:
- Your Budget
- Total Debt
- Retirement Plans
1) Your Budget
It’s critical to fully understand your budget and total financial situation before you make a strategy for how to invest $5,000. To do that, list your total monthly income against your total monthly expenses.
In your expenses column, include all your costs for the month, both essential and non-essential.
Essential costs are those that are necessary, like rent or mortgage payments, groceries, and utilities. Also include necessary bills like for credit cards or student loans that you must pay.
Subtract your expenses from your income to see if you have a surplus of funds in your budget or a shortfall. That’s called cash flow. If your cash flow is a positive number, you have a healthy budget. If it’s negative, then you need to make budget cuts or improve your income.
You have many options for making budget cuts. Ideally, you should first eliminate or reduce non-essential expenses like entertainment or new clothes. Then, see where you could lower your costs, such as by using grocery coupons or cutting back on your energy use.
To improve your income, consider adding a side hustle like freelancing.
2.) Your Debt
Once you have a good budget in place, take a look at your debt. If you have a large amount of revolving debt, which is credit card debt, you should consider paying that down before investing.
The reason to pay off credit card debt before investing $5,000 is that credit card debt can grow quickly and easily offset any gains you make investing. Revolving debt has no fixed end date, so you could be carrying that debt for a long time, paying expensive interest costs along the way.
The same power of compounding that can work in your favor with investing can work against you with credit cards. So, instead of investing for gains, paying off credit card debt is likely more ideal for your long-term financial health.
If you have fixed debt, like a mortgage or a student loan, it is less critical to pay that debt down quickly. In deciding whether to pay off fixed loans over investing, consider the interest rate you are paying on the loan.
So, paying off a car loan with a 3% interest rate is less urgent than a credit card debt with 22% APR. With the car loan, the question is whether you think you will make more or less by investing instead of paying it off first?
The bottom line is that you should only start investing if you think your investments will earn as much or more than the interest you pay on your debt. If your investments likely won’t return as much as your debt is costing you, you would be losing ground, so you should pay your debt off first.
- How to Pay off Debt Faster
- How to Increase Your Credit Score Right Now
- The Power of Low Interest Rate Credit Cards to Manage Debt
3.) Your Retirement Plan
Finally, make sure your retirement plans are on track before you turn to learning how to invest $5,000.
One of the best things you can do to save for retirement is use tax-advantaged retirement accounts like 401(k)s and IRAs to your benefit.
Consider putting the maximum amount toward those type of accounts before you get into learning how to invest $5,000. If your workplace provides a 401(k) with matching contributions, you should be making at least that matching amount, financial advisors recommend. Otherwise, you are leaving free money on the table.
You can also take advantage of traditional or Roth IRA accounts, which offer tax breaks. As of 2020, you can contribute up to $5,500 to either of these accounts, or $6,500 if you are 50 or over.
A traditional IRA offers a tax break with an income tax reduction. A Roth IRA does not provide an income tax deduction, but the gains on your investments will be tax free when you withdraw them in your retirement years.
Consider making the maximum contributions to your retirement accounts before investing outside of them. Have a well-developed plan for how much you will aim to save by retirement, and how much you will save per year to get there.
9 Ways to Invest $5,000 When You’re Really Ready
Finally! Once you’ve established that you are in good financial health with managed debt and a solid retirement plan, you can finally focus on how to invest $5,000.
Your money can work for you in several different ways. Each investment carries its own level of risk and reward, with pros and cons to consider.
Here are Credit Card Arrow’s Top 9 investment suggestions. (Lean more details about how to invest with these methods below.):
- Stock Market
- Mutual Funds or ETFs
- REITs and Real Estate
- CDs or High-Yield Savings Accounts
- Start a Business
- Peer-to-Peer Lending
- Home Improvement
- Investments to Avoid
1. Step into the Stock Market
Stocks are a very popular way to grow wealth. When you buy a stock, you are essentially buying a piece of the company.
You become one of many owners, even though you have no direct say in how the company operates. You do, however, profit when the company profits and take losses as the company’s stock takes losses.
Shares prices are determined by market value. Prices are set based on how investors expect it to perform. In a good economy, stocks tend to rise because investors expect companies to do well. In a poor economy, the opposite is true.
Pros: In the long-term, stock have historically proven to be good investments. On average S&P 500 stocks make 7% to 8% annualized gains. Keep in mind that includes both rallies and downturns, every year returns are different.
Cons: Stocks are also risky. Shares could fall for any number of reasons. Some stocks, like burgeoning tech stocks, are considered more risky than others. Larger established companies with worldwide brands, or “blue chip” stocks, tend to offer more stability. But their returns may be more modest than what you could potentially get with the likes of a new tech stock.
How to Invest $5,000 in Stocks: With buying stocks, diversity is key. Financial advisors would recommend that you avoid buying $5,000 worth of shares in a single company.
Instead, to minimize risk, consider buying shares in at least three different sectors. The more diversity you have in your portfolio, the lower the risk. So spread your money into different companies.
2. Invest in Mutual Funds or ETFs
Mutual funds and exchange-traded funds (ETFs) offer investors a way to invest in several stocks or other assets at once. The funds hold the securities, then investors buy shares of the fund. So, investors own a portion of the fund, instead of the company directly.
Mutual funds and ETFs are similar, but they do have key differences.
Mutual funds are generally actively managed, meaning a human professional oversees them. Exchange-traded funds are typically passively managed, meaning they simply following an index or sector.
You can buy an ETF just as you would a stock – over an exchange like E*Trade. You buy mutual funds from a mutual fund company or a broker.
Pros: Mutual funds and ETFs have a number of advantages. They provide diversity because they hold several investments, so investor are exposed to more than just one company.
Diversity helps lower the risk of a portfolio. That’s because if one investment fails, your holdings will not be wiped out.
Cons: Mutual funds and ETFs may not be ideal for investors who want to buy a specific company.
For example, if you think a particular retailer is about to take off, buying its stock may be a better choice for you than buying a fund that holds its stock. That way you can try to maximize your gains where you believe they will be made.
How to Invest $5,000 in Mutual Funds or ETFs: Many people use the “lump sum” method of investing.
So, they set an amount that they’d like to invest, then buy as many shares as the money allows. For example, if you have $5,000 to invest and each share was $25, you could purchase 200 shares (5,000 divided by 25).
You can combine a strategy of investing in mutual funds or ETFs with investing in other assets like stocks or bonds.
3. Turn to Bonds for Safety
Many investors include bonds as part of their portfolio to add stability. Bonds are considered low risk investments, although they also tend to provide more modest returns than stocks.
Bonds are a common part of an income portfolio for retirees, but other investors use them as well.
The three main types of bonds are:
- Corporate bonds offered by companies
- Treasury bonds, or T-bonds, offered by the U.S. government
- Municipal bonds, issued by small governments like towns, cities and states
You buy a bond for a “face value” or flat rate. You are basically buying debt. Then, for a specific amount of time, you receive regular payments from the company or government to repay that debt. You’ll get repaid both the principal that you originally paid, as well as interest.
The face value of a bonds can increase or decrease, depending on the broader interest rate market. If overall interest rates are declining, the value of a bond goes up. That’s because investors are willing to pay more for that higher rate of return versus the lower interest rates for new bonds.
Of course, the value of your bond could just as easily decline if interest rates rise.
Pros: Bonds offer a relatively safe place to put your money while earning some reliable income. With regular payments, you will have predictable returns, which allows you to plan your finance better.
Companies and governments are also unlikely to default on their bond payments.
Cons: Bonds do generally provide a lower rate of return than investments like stocks.
How to Invest $5,000 in Bonds: Since bonds are a fairly safe investment, diversifying your bond portfolio is less of a concern than it is with stocks. Still, bonds are not risk free so including some diversity in the bonds you buy can help lower your overall risk.
You may want to invest your full $5,000 in bonds, or you may want to consider investing a portion in bonds and a portion in other assets that have higher returns.
4. Use REITs to Buy into Real Estate
With $5,000, you have limited choices for buying property directly. Instead, you can use investment vehicles called Real Estate Investment Trusts (REITs) to invest in real estate.
REITs hold ownership in properties (or help finance properties), then sell shares in the stake of ownership in the properties through the REIT. The properties REITs hold usually generate income, such as from rentals.
REITs provide profits through, for example, the rental income they collect from properties or property appreciations. Basically, investors can earn money from the money the properties earn, and they can also benefit if the value of the property increases.
You can invest in shares of a REIT just like you would invest in a stock, buying them over an exchange, which you can do online.
Pros: REITs offer the advantage of allowing investors to tap into real estate market trends without having to purchase property outright. With property, the big advantage is that even if the value of the real estate goes down, you still have an underlying “hard asset.” So it’s very unlikely you’d ever lose everything.
Cons: The real estate market generally goes up, but it does carry some degree of risk. Especially in an economic downturn, property prices can be soft, meaning your gains may not be impressive, if you have any at all.
How to Invest $5,000 in Real Estate: Real estate makes a great addition to your portfolio.
If you’re going to invest your full $5,000 in REITs, make sure the funds hold multiple properties or are well diversified. That way, you lower your risk. You can invest in REITs in combination with other assets for a well-balanced investment strategy.
5. Open a CD or High-Yield Savings Account for Lower Risk Investing
If your goal is more to protect your money from losses rather than to earn a competitive profit, you might want to consider a Certificate of Deposit (CD) or high-yield savings account.
Both CDs and high-yield savings accounts virtually insure you won’t lose money — but you won’t make as much as you could with other assets.
CDs have a fixed term whereas savings accounts are open ended. Typically, the longer the term for the CD, the higher the interest rate. With high-yield savings accounts, you usually have a minimum deposit amount, but it’s rarely over $5,000.
Pros: The biggest pro for CDs and high-yield savings accounts is peace of mind. For investors who want to be sure that their investment doesn’t decline in value, CDs and high-yield savings accounts both offer excellent principal protection and assurance that your invested money won’t be lost.
In other words, they’re very low risk. They make a good addition to a fixed-income portfolio because their monthly gains are predictable.
Cons: CDs and high-yield savings accounts do provide reliable returns, but they aren’t as much as you might make with riskier investments like stocks.
Typically, you can get about 1% to 2% in annual return for these investments, versus a 6% to 7% average annualized return we’ve historically seen in S&P 500 stocks.
How to Invest $5,000 in CDs or High-Yield Savings Accounts: To invest in a CD or high-yield savings accounts, you simply open an account with a bank, and then transfer the money into it.
Be sure to understand the terms of your account, including whether there is any fee for early withdrawal. Also, it pays to shop around because not all CDs and high-yield savings accounts are the same.
6. Start Your Own Business
Launching a new business takes a lot of hard work and some initial investment. Some business owners start a business with tens of thousands of dollars. But many have found success starting a business with less than $5,000.
If you’re looking for a fresh start to your career, you have limitless choices – like starting a blog, podcasting, or opening an online store, just to name a few.
Consider what you enjoy doing and your area of expertise. Think about how you can craft a business with those skills.
Pros: A successful business can bring tremendous advantages to your life – from giving you a line of work you enjoy to offering flexibility in your schedule. Many business owners have found great financial returns from their business growth.
Cons: Starting a business takes dedication, time and energy. Unlike other investments, you cannot just buy into an asset and watch your money grow. You must work hard for it to be successful.
How to Start Your Own Business with $5,000: To start a business, you’ll need a well-developed business plan.
You can find some guidance on how to develop one, along with ways you can get more funding, from the U.S. Small Business Administration and your state business development office.
7. Help Another Person with Peer-to-Peer Lending
Believe it or not, you can use your money to help others while also earning a profit.
Peer-to-peer lending puts your money toward loans for other people. They may need loans for refinancing their debt, to start their own business or for other needs.
The peer-to-peer lending platforms provide the funds with your money and then collect payments from the borrower. You are then repaid what you contributed, as well as interest from the loan, which is your profit.
Pros: With peer-to-peer lending, you get a sense of helping others with their own financial goals while also earning a profit. You’re return is predictable, which is good for planning.
Depending on the terms of your loan, you may earn a return that is competitive with returns from other investments.
Cons: Like with any investment, peer-to-peer lending does carry some risk. Borrowers can default and you could lose your money. However, the risk of that is very low.
How to Invest $5,000 in Peer-to-Peer Lending: You can invest in peer-to-peer lending through third-party platforms like the Lending Club, which has a minimum investment requirement of $1,000. With $5,000, you could fund several borrowers, depending on their borrowing needs.
8. Increase Your Home Value with a Remodel
Renovating a home that you own is actually a form of investment because it adds value to your home, often more than what it costs to make the renovation.
Not all home renovations return the same value, so it pays to do your research on how an improvement can help boost your home’s sale price.
Pros: You can enjoy an updated house while also seeing a good rate of return on the value of your home. In many cases, an upgrade significantly boosts the value your home to more than what the upgrade actually costs.
Cons: While you will have a fresh living space, you won’t see financial returns on your investment until you sell the home. Depending on your plans to sell, that may not be for many years.
If you need to see a financial return on your investment sooner, you might want to consider other investing choices.
How to invest $5,000 in Home Renovations: You can upgrade many areas of your home, but some spaces to tend to have a greater return than others. Kitchens and bathrooms can increase the value of your home for resale more quickly than other spaces.
If you don’t plan on selling your home for many years, this investment strategy might not work because your upgrades could be outdated by the time you want to put your home on the market.
9. Invest $5,000 in Your Own Growth
Finally, you can use your $5,000 to make yourself more valuable by taking a course that fits your career goals. Find classes either online or at a location near you that offer skills that can improve your work.
Over the long run, you could easily see returns from $5,000 invested in yourself.
Pros: Your education lasts your lifetime. An investment in knowledge related to your career can pay off for many years and result in a more rewarding life.
Cons: Educating yourself does not produce immediate monetary results the same way investing in other assets does. There is no guarantee for a return on your money. What you gain from an education can vary widely.
How to Invest $5,000 in Yourself: Courses and education can benefit each person in a different way. What is right for you depends on your financial goals, interests and career track.
There are plenty of courses in many fields that are under $5,000. Read the reviews and consider how learning the material can help you move toward your next goal.
3 Places to Avoid Putting $5,000
Not all investments are reputable investments. You should be aware of some ways you shouldn’t “invest” your money because you could easily lose it all.
Penny stocks. Don’t let stocks that you can buy for less $5 fool you. Sure, some of these stocks have the potential to bring good returns, but most of them don’t.
Typically, companies offering penny stocks are new and small companies and they don’t disclose their financials. It’s difficult for investors to fully research these companies and gauge how well they might perform.
If you really are determined to get into trading penny stocks, be sure you know the high risks involved. And be prepared to lose your money because odds are you will.
Pyramid Schemes. Companies that promise to make you rich quickly probably won’t. In fact, they may be illegal schemes or frauds.
Pyramid schemes, also called Ponzi schemes, are those that make you pay up front and promise you high returns when others join in your wake. Steer clear of these business structures.
Gambling. Some people do win big in gambling. But gambling is not investing. The odds are always against you and for the house. So statistically you’re more likely to lose money gambling than you are to win anything. If you’re going to gamble, gamble for fun and not to make money.
Fortunately, you have many options for how to invest $5,000, from investing in the stock market to launching your own business. Weigh the pros and cons of each investing method we described above to find the best strategy for you.
Remember, before you invest, give your finances a health checkup to make sure you are in the best position to start investing. And be aware of promising risky investments like penny stocks and pyramid schemes that may not be what they seem.
The bottom line is, the sooner you can start investing your funds in a safe way, the more you can benefit from the rewards of your investment.