Learning the best ways to invest $5,000

How to Invest $5k

If you’re lucky enough to have an extra $5,000 from a side hustle, a bonus at work, or an inheritance, you may be wondering what to do with it. While some people will use the money to pay off any debt they may have, others will invest it.

According to a recent Federal Reserve survey of consumer finances, 58% of U.S. households own stocks, more than ever before. If you want to invest with your new wealth, you might wonder what’s the best way to invest $5,000.

Keep reading as we explore some of your options. The direction you decide to take, will ultimately be decided by your goals and risk tolerance.

How to Invest $5,000

1. Invest in your 401(k) To Get Your Employer Match

Learn the best ways to invest $5k

If your employer offers a 401(k) retirement savings plan with a company match, this is the first place you should start. Many employers will match your 401(k) investments up to a certain percentage or dollar amount.

The employer decides how the 401(k) is structured, but here’s an example.

The employer will match 50%, up to an 8% employee contribution.

This means if the employee contributes 8% of their salary to their 401(k), the employer will match an amount equal to 4%.

Take advantage of this benefit because it’s essentially free money toward your retirement.

There are limits on how much you can invest in a 401(k) each year, but it’s well above your $5,000. In 2024, the maximum contribution amount is $23,000. If you’re over 50, you’re allowed catch-up contributions of $7,500, bringing the total contribution for the year to $30,500.

2. Open or Contribute to an IRA

Another option for your $5,000 would be to invest it in an IRA. If you don’t already have an IRA, you can open one through most brokerage accounts. IRAs are another great way to save money for retirement.

Similar to your 401(k), annual IRA contribution limits exist. In 2024, you can contribute up to $7,000. However, if you’re over 50, you can make catch-up contributions of $1,000, making the total contribution limit $8,000.

3. Invest With a Robo-Advisor

If you’re not comfortable picking individual stocks and creating your own investment portfolio, a great alternative is to use a robo-advisor.

Robo-advisors have become extremely popular over the past decade as they’ve helped inexperienced investors enter the stock market.

When you sign up for a robo-advisor, you’ll be asked to fill out a brief questionnaire that allows the robo-advisor to understand your goals and risk tolerance better. With this information, the robo-advisor can build a diversified investment portfolio. Then, periodically, the portfolio will be assessed to make sure it’s still maintaining the correct asset allocation. If it’s not, it will be automatically rebalanced.

Robo-advisors have a small management fee, typically between 0.25% and 0.50% of the account balance.

4. Buy Commission Free ETFs

Exchange Traded Funds (ETFs) are a collection of financial securities (usually stocks) that typically track an index like the S&P 500 or NASDAQ. Because these investments comprise dozens of companies, they’re an easy way to build a diversified portfolio.

Many people think mutual funds and ETFs are nearly the same, but they have a couple of significant differences. Some mutual funds charge load fees of up to 3%. Think of this as a fee for the right to invest in the fund. ETFs don’t charge these types of fees. 

Both mutual funds and ETFs have expense ratios, but the expense ratio for an ETF is usually much lower. These fees are deducted from your account balance annually and can drastically reduce your annual returns.

Mutual funds typically have a minimum investment amount. Sometimes, this could be $2,500, and other times, it could be $10,000 or more. ETFs don’t have a minimum investment. Instead, they trade based on a share price, similar to buying an individual stock, which drastically reduces the cost of purchasing an investment.

ETFs can be purchased through your brokerage account without any trade fees. These commission-free ETFs make it even more accessible for people to buy and sell.

5. Invest in Dividend Stocks

If you’re a more experienced investor, you could build your own portfolio with dividend stocks. Dividend stocks give you the chance to make money in several different ways. You can earn a return when the stock appreciates in price and also with quarterly dividend payments.

To find the best dividend stocks, look no further than the Dividend Aristocrats. These are S&P 500 companies that have increased their dividends in each of the past 25 years. Companies like AT&T and 3M have dividend yields that exceed 6%.

You can use Ziggma’s Dividend Tracker to monitor your dividend income and find new opportunities that fit your investment strategy.

6. Invest in Your Children With a 529 Account

If you have kids but haven’t set up a college education fund for them yet, now would be a great time. Opening a 529 account as early as possible will allow you to take advantage of compounding interest.

For example, let’s assume you deposited $5,000 into a 529 account for your child as soon as they were born. If you continue making $100 monthly contributions until they’re 18 (assuming an 8% return), the account would have more than $66,500 by the time they’re ready to start college.

529 accounts work very similarly to an IRA. Any income you earn in the account can be withdrawn tax-free for education expenses. However, if you use the money for anything else, the gains will be taxed, and you’ll also face a 10% penalty.

While you cannot claim a federal tax deduction for 529 contributions, some states allow you to deduct your contributions from your state income taxes.

7. Invest in Alternative Investments

If you’re willing to take on more risk, you could consider using your $5,000 to invest in alternative assets. While alternative assets like real estate, crypto, and fine art are riskier than many other investments, they’re a great way to further diversify your portfolio.

Cryptocurrencies

Even though it’s been a rough ride for many cryptocurrencies over the past couple of years, they’ve come storming back as Bitcoin has once again found some momentum. Much of this has come since the United States Securities and Exchange Commission approved the first US-listed ETFs tracking Bitcoin.

However, because investing in crypto comes with significant risk, you shouldn’t use your entire $5,000 investment. Instead, use 5% to 10%, then invest the rest in something else on this list.

You should also try to learn as much as possible about the crypto coin you plan to invest in. Like purchasing stock shares in a company, you want to know as much about the company or coin as possible before investing your cash.

Real Estate

If you’re considering investing in real estate, there are ways to invest 5,000 dollars without buying physical property.

Real Estate Investment Trusts (REITs)

REITs are companies that own many different commercial real estate assets, such as apartment buildings, shopping malls, or hotels. Some REITs are traded on an exchange, like individual stocks. These tend to have a little less risk, and your investment is more liquid. However, other REITs are privately held and tend to be riskier because they’re harder to sell.

REITs tend to be popular investments because they can pay out high dividends. These dividends are derived from rent payments the asset has generated and appreciation.

Investing in real estate
Real Estate Crowdfunding

Real estate crowdfunding has become a popular way to invest indirectly in real estate. These platforms connect real estate developers with a large group of investors.

Instead of making a down payment and purchasing a property on your own, you’ll pool your funds with other investors to complete the purchase. This has become a very hands-off approach to real estate investing because the developer handles most of the work (development, maintenance, etc.).

The attractive thing about real estate crowdfunding is that some companies will allow you to start with as little as $10. While many are available to all investors, some are only open to accredited investors.

Some of the more popular real estate crowdfunding platforms include Fundrise and RealtyMogul.

9. Invest in a Health Savings Account

Health Savings Accounts (HSAs) are a popular way to save for medical expenses when you have a high-deductible health insurance plan. These plans have a lower monthly premium but high deductibles. Having an HSA in place can provide some protection if you were to become ill or injured and need help paying your deductible.

There are contribution limits for how much you can invest in an HSA each year. For 2024, the limit is $4,150 for individuals and $8,300 for families. If you’re over 55, you can contribute an extra $1,000 each year. Plus, your contributions are tax-deductible, and you can withdraw your funds tax-free at any time for medical expenses.

Another reason people love having an HSA is that it also serves as an additional retirement savings account. If you withdraw your funds before 65 for anything besides medical expenses, you’ll pay income taxes on the earnings and a 20% penalty. However, as soon as you turn 65, the money can be used for anything without penalty, but you’ll pay income taxes if the funds are used for anything besides medical expenses.

10. Build an Emergency Fund

Finally, if you don’t have an emergency fund, this could be an excellent use for an extra $5,000. Unexpected expenses are almost inevitable at some point in your life. Having an emergency fund that can help pay for these expenses can prevent you from going into credit card debt.

Most financial experts recommend having funds to cover at least three to six months’ worth of expenses. This money should be kept somewhere so that you have easy access to it if an emergency pops up. A high-yield savings account will still allow you to earn a little interest on the money.

The Bottom Line

If you have an extra $5,000, this could open many opportunities for you. Not only can this kind of money help you pay off any high-interest debts, but it can also give you a head start on reaching your financial goals. 

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