If you would’ve asked me about the best ways to invest $5,000 a decade ago, I probably would’ve told you to invest into a high-yield savings account, to park your money in index funds, or to open an account with a peer-to-peer lending platform like LendingClub.
But now that we’re well into 2022, the investing world is considerably more diverse than it used to be. In fact, there are cryptocurrencies, robo-advisors, and all kinds of platforms that didn’t even exist 10 or 20 years ago.
The sheer number of investing platforms and apps today can make it harder to figure out what to do. That could be why, according to a study from Magnify Money, 60% of Americans feel anxiety when they think about investing in the stock market.
The way you invest should depend largely on your goals. Are you investing for retirement? Or, are you investing money you’ll need five years from now?
The bottom line: Your timeline should play a huge role in the way you invest your money, and so should your tolerance for risk.
How to Invest $5,000 Starting Today
People ask me all the time about the best ways to invest their money and especially amounts in the $5,000 range. I’ll answer that question, but I have a warning first.
If you need access to your cash in the very short-term (a few months to a few years), then you probably shouldn’t invest it at all. Instead, you should take your cash and put it into a high-yield savings account. You won’t earn a huge return that way, but at least your money will be there when you need it.
If you have the ability to invest the extra money you won’t need for many years or even decades, then I do believe some strategies could leave you significantly better off than others.
Here are some of the best places to invest $5,000.
1. Invest in Fractional Shares with Robinhood
Risk level: Medium
If you’re hoping to invest in stocks or ETFs but you want to make sure you’re as diversified as possible, investing in fractional shares makes a ton of sense. After all, fractional shares represent a fraction of a stock or another investment. By buying fractional shares instead of a whole share, you have the opportunity to invest your $5,000 into many different stocks or ETFs instead of just a few.
How It Works: Buying fractional shares lets you own fractions or “slices” of popular companies, which can bring them within your reach. After all, a single share of Amazon (AMZN) stock currently trades for over $3,000, which is a fairly high barrier to entry. With fractional shares, however, you could invest into a fraction of Amazon stock while diversifying the rest of your investment money elsewhere.
How to Get Started: Stash is another popular option to check out.
- Invest in Fractional Shares
Who It’s Best For: You can get started investing in fractional shares with Robinhood for as little as $1, so this option is a good one for anyone who is just getting started.
|Fractional Share Investing Pros||Fractional Share Investing Cons|
|Diversify your initial $5,000 investment across more stocks and ETFs||If you choose a brokerage firm who charges commissions, costs can add up|
|You can invest in fractional shares with nearly any online brokerage firm including Robinhood, Fidelity, M1 Finance and more||Not all brokerage firms let you invest in fractional shares|
|Buy into big-name stocks without having to purchase a full share|
2. Build a Micro Real Estate Portfolio with Fundrise
Risk level: Medium
Fundrise has made it extremely simple to add real estate to your investment portfolio — even if you just have $5,000 to get started. Not only does this platform make it easy to invest in real estate, but it’s also a very profitable way to use your $5,000 that’s just sitting around. Fundrise boasted an impressive average ROI of 9.47% in 2019. Unless you want to be a hands-on landlord, this is an excellent way to utilize your extra cash.
How It Works: This platform lets you buy notes in different real estate investments that go through scrutiny by various real estate experts, and only 2% of the people who request loans through Fundrise get approved.
How to Get Started: Opening an account with Fundrise works similarly to opening a brokerage account. All you have to do is provide your personal details and information before selecting a portfolio option based on your timeline and appetite for risk. The minimum account balance for a Starter Plan with Fundrise is just $500.
- Build a Micro Real Estate Portfolio
Who It’s Best For: Fundrise is a great choice for anyone who wants to invest in real estate without having to be a landlord.
|Fundrise Pros||Fundrise Cons|
|Low minimum of $500 to get started||Your money isn’t liquid since Fundrise isn’t required to let you cash out at any time|
|Historical returns are high (average return of 9.47% in 2019)||Complex investment options can be difficult to understand|
|Only 0.15% in annual advisory fees|
3. Start a Roth IRA
Risk level: Varies
A Roth IRA is a type of investment account you can open in addition to other retirement accounts you have, including a workplace 401(k). This type of account lets you invest post-tax dollars, meaning it doesn’t offer any upfront tax advantages. However, money invested in a Roth IRA account grows tax-free over time, and you don’t have to pay income taxes on withdrawals once you reach retirement age.
How It Works: Roth IRA income caps limit who can contribute, meaning you can’t use this account if your income is too high. For example, single filers can only contribute the full amount to a Roth IRA if they earn less than $125,000, and income phase-outs begin at $125,000 and end at $140,000. Married couples can only contribute the full amount to a Roth IRA if they earn less than $198,000, and phaseouts begin at $198,000 and end at $208,000.
How to Get Started: You can open a Roth IRA with any online brokerage firm of your choosing. For 2022, eligible participants can contribute up to $6,000 across their IRA accounts. However, those ages 50 and older can contribute up to $7,000. We recommend checking out Betterment to open your account.
Who It’s Best For: Investing in a Roth IRA makes sense for anyone who wants to save for retirement, but especially for people who believe they’ll be in a higher tax bracket once they reach retirement age.
|Roth IRA Pros||Roth IRA Cons|
|Your money grows tax-free, and you can take tax-free withdrawals in retirement age||Contributions are not tax-deductible in the year you invest|
|You can withdraw contributions (not earnings) at any time without penalty||Contribution limits are fairly low|
|Roth IRA accounts can be opened with nearly any brokerage firm, and you can choose the investments for your account||Income caps limit who can invest with this type of account|
4. Let Robots Invest for You With Betterment
Risk Level: Varies
If you’re ready to invest into stocks and other securities but you aren’t sure how to get started, then Betterment can be a good option. Betterment is one of the best ways to invest your $5,000 and then forget about it. This robo-advisor will ask you important questions and help make investment decisions on your behalf.
After you create a Betterment account (which takes less than a hour), you can deposit your initial investments, set your financial goals, and decide on your risk tolerance. After you’ve made those decisions, Betterment handles everything else for you.
How It Works: The website uses technology to invest your money without you having to spend hours comparing different companies or options. Instead of diving into the research yourself, you take a short questionnaire to determine what you feel is an acceptable level of risk in the market and the algorithm takes that risk tolerance and makes investments for you.
Betterment even rebalances your portfolio as needed. If your tolerance for risk ever changes, you can log in and make changes to your preferences. From there, Betterment will update your portfolio accordingly.
How to Get Started: Open an account with Betterment by providing information like your email, your home address, your phone number, your Social Security number, and your banking details. You can fund your account electronically, and Betterment will help you grow wealth based on your investment timeline and goals.
- Hands-off Investing
Who It’s Best For: Betterment is a great option for beginning investors as well as those who prefer a hands-off approach.
|Betterment Pros||Betterment Cons|
|Fees are relatively low; you’ll pay 0.25% per year on your invested balance||Charges fees, which you can avoid by investing on your own with a commission-free platform|
|Betterment uses technology to invest efficiently based on your preferences|
|Good option for novice investors|
5. Diversify by Investing in ETFs
Risk Level: Varies
An exchange-traded fund, or ETF, is a collection of securities (such as stocks) that usually track an index like the S&P 500. Since ETFs include an assortment of investments, they’re naturally diverse on their own. ETFs are traded on the stock market just like a single stock. This means you can buy much smaller pieces of these funds instead of starting with a large initial investment.
How It Works: You can invest in ETFs just like you would in a mutual fund or an index fund. All you have to do is open a brokerage account and choose the ETFs you want to invest in. You can also invest into ETFs within a retirement account you have, such as a Roth IRA.
How to Get Started: Ally Invest is a great place to invest into ETFs, and your initial investment of $5,000 will get you off to a good start. You’ll want to do some research on the funds and how they’ve performed over the last one, three, and 10 years. Many funds have decades of history, which makes it easy to see how they performed over your entire lifetime.
Who It’s Best For: ETFs are a great option for new to experienced investors.
|Pros of Investing in ETFs||Cons of Investing in ETFs|
|ETFs normally have low expense ratios and trading fees||Come with the same risks as other stock market investments|
|You can usually get started with a low account minimum (or no account minimum)||ETFs vary widely, so you’ll need to do plenty of research before you invest|
|Lower tax liability than mutual funds|
6. Invest in Your Kids Through a College Savings Accounts
Risk Level: Varies
The most common way to prepare for the cost of college involves opening a 529 college savings plan. These plans are also known as Qualified Tuition Programs, and they allow you to invest the after-tax dollars in the plan.
From there, you can withdraw that money and any investment growth tax-free provided you use it to pay for costs associated with higher education (tuition, college fees, textbooks, etc.)
How It Works: You can open a 529 account regardless of where you live and the age of your children, yet you should figure out if your state offers any tax benefits for doing so. For example, the state of Indiana offers a 20% tax credit on the first $5,000 you contribute each year. If you’re married, filing jointly, that’s $1,000 back from the state at tax time if you max this benefit out.
How to Get Started: Start by researching 529 plan options in your state, and make sure to compare them based on fees and investment options. If your state does not have any incentive for investing in their 529, then I would look at opening an account with Wealthsimple.
- Open a 529 College Savings Plan
Who It’s Best For: College savings accounts are a good option for investors with kids who’ll likely attend college. After all, the cost of higher education isn’t going down any time soon.
|529 Savings Plan Pros||529 Savings Plan Cons|
|Money grows over time and can be withdrawn tax-free for higher education expenses||Funds must be used for eligible higher education expenses, or else penalties will apply to withdrawals|
|Some states offer tax benefits||Fees vary and can be high|
|Prepare early for the high costs of college||College savings plans can vary in terms of their investment options|
Your Investment Style
The options above all represent smart ways to invest $5,000, although the best option for you can vary based on your tolerance for risk, your investing goals, and your timeline. Also remember that your investing style can make a difference. After all, some people prefer to have someone else invest their money for them, yet others love to learn as much as they can so they can invest with confidence on their own.
If you’re a do-it-yourself investor, quite a few options on this list would work for you. You could invest into ETFs or fractional shares within a Roth IRA or in a brokerage account, but you could also invest into Fundrise.
If you need investing help, on the other hand, then hiring a robo-advisor like Betterment could be your best bet. After all, robo-advisors use advanced algorithms to make smart investment choices on your behalf, and they do so with minimal fees.
Regardless of whether you’re a new investor or a seasoned pro, it’s vital that you make the best decision for your money. Fortunately, the internet is a treasure trove when it comes to researching investment options and executing on the ones you like.
Take your time, do your research, and find the best place for your $5,000. Doing so is the best way to ensure your initial investment grows with time.