Once you have $5,000 to invest, you’re now open to a number of options for how to grow it.
It is unlikely that a $5,000 windfall will change your life, but it might change how you invest or encourage you to start investing if you haven’t done so already.
Best Ways To Invest $5,000
It depends on you, but we have some ideas. There is surely one that matches your tolerance for risk and your goals, and they are all within your reach.
1. Invest In Your 401(k) And Get The Matching Dollars
In case you have a 401(k) if your employer offers to match your contributions and you aren’t accepting this offer, you ought to take advantage of it. In many cases, your employer will match half or all of your contributions, which can range from 3% to 6% of your salary. Investing in it offers the highest guaranteed returns.
In most cases, you cannot deposit a lump sum, such as $5,000, into your 401(k). However, having that money in the bank allows you to start working on grabbing those matching dollars. As a result of your 401(k) contributions, your paycheck will be smaller. However, you can pay the $5,000 back at the end of each pay period or whenever the money runs out.
2. Use A Robo-Advisor
You could create your own portfolio of ETFs, or you could let a computer-based advisor manage a pre-built portfolio on your behalf. The services of Robo-advisors cover all aspects of portfolio management.
The easy way out comes with a price, usually about 0.25 percent to 0.35 percent of your account balance, in addition to the expense ratios of your ETFs. Nevertheless, there are some free options available.
With Wealthfront, you can manage up to $5,000 for free if you have a $500 minimum. Axos Invest is free and does not have a minimum investment requirement. Intelligent Portfolios, Charles Schwab’s advisor, also requires $5,000 to get started, but it does not charge a management fee for its services.
3. Open Or Contribute To An IRA
Contributions to an IRA are limited to $6,000 in 2022 ($7,000 if you’re 50 or older), meaning you’re close to meeting the limit. Having that close might encourage you to squeeze together the rest, but even if you don’t, it makes sense to invest in an individual retirement account (in the absence of a 401k) or if you have received matching funds.
Similar to a 401(k), an Individual Retirement Account is a retirement account, but it does not require an employer. An IRA can be opened at any online broker. The majority of accounts don’t have a minimum balance; the few that do either require a minimum balance of $5,000 or waive it.
4. Buy Commission-Free ETFs
Invest in exchange-traded funds, which can be bought through an IRA account or an online brokerage account. An ETF is an index fund that trades like a stock. It saves you the hassle of following minimums by allowing you to purchase shares at a price typically much lower than the minimum for most funds. The more funds you buy, the more diversification you get, and your money is spread out in a way that is suitable as you age and become more risk-averse.
The expense ratios of ETFs are generally low, but you should look for commission-free ETFs since you won’t be charged buying or selling fees. These fees can add up to $10 and really hurt a small investment. Brokers usually list ETFs that are commission-free.
5. Trade Stocks
It’s hard to resist the appeal of stock trading, so if you’ve been tempted, maybe the time has come to try it out — only with a very small portion of your portfolio. In general, you should limit stocks to 10% of your investment portfolio, and the remainder should be invested in low-cost funds that are intended for retirement.
Would you like to know how to reopen a closed savings account? Read our blog to learn.