When I first started to invest, I could only afford a measly $50 per month.
Granted, I was in college still and living on Ramen noodles but with a part-time job at the mall and an internship at our local investment firm, I finally started to understand the importance of investing.
Over time that $50 a month turned into $100 a month, then $250 a month and kept growing from there. It almost seemed surreal when it got to a point where I could invest $5000 at once into one investment.
It was an awesome feeling but also scary knowing how long it took me to save up that $5000.
Hopefully you have found yourself in the same situation, trying to figure out what to do with $5,000 sitting in your bank account. There are several different avenues you can take, and it's important that you understand all of your options.
The top 8 best ways to invest $5,000
Invest in Others – Lending Club
What I like about Lending Club is that it reminds me of when I first started investing into mutual funds. You didn't have to put a lot of money down and you're able to diversify your investments.
With Lending Club since you are investing into micro-loans not one borrower is going to get 100% of your investment.
So if you had $5000 to invest, you can take solace in knowing that that money is spread out just like if it was in a mutual fund
Another appealing feature of Lending Club, for those that don't want anything to do with the stock market, is that it operates completely independently of the stock market. When you turn on the news and see the Dow Jones is either 400 points or down 500 points it doesn't matter when you are utilizing a peer to peer lender like Lending Club. You sit back and collect the interest and take it as cash or you can reinvest it to new notes and make even more interest.
Depending on which type of account you open you may have some fees with Lending Club. If you open a retirement account (IRA, Roth IRA, etc.) you will have some annual fees until your account reaches a balance of $10,000. In my Lending Club review you can learn more about the fees and how I have been using the service.
Let Robots Invest for You – Betterment
With any sort of stock investing I will always recommend making those investment inside of a Roth IRA. Since most people can grow their cash tax free while investing up to $5,500 per year in a Roth IRA, make sure to check into a Roth account for the next three options for investing your $5k
If you are not a hands-on investor that wants to play a role in deciding which investments are best for you. If you fall into this category, then Betterment is going to be the best route for you. Betterment is one of the best ways to investment your $5,000 and then forget about it.
Betterment makes investing your money as easy as a few clicks of your mouse. After you create a Betterment account (which will less than a hour), you can deposit your initial investments, set your financial goals, and your risk tolerance. After you've made those decisions, Betterment will handle everything else for you.
The website uses “robo-advisors” to invest your money without you having to spend hours researching different companies or options. Instead, 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 and the service changes your portfolio accordingly.
Go Safe with a High Yield Savings AccountYou are not going to make an amazing amount of interest in any savings account, but your money can grow and there is no risk of losing it. Typically, I recommend going with a savings account if you are still looking for the right investment and need to do some more research or if you need very quick access to the money and cannot afford to have any losses in the short term. That being said, not all savings accounts are created equal. Your average bank that you can walk up to and talk to someone in their office is going to give you an average interest rate of 0.06%. This is why if you are going to open an account I highly recommend an online high yield savings account. These accounts are mostly online and offer much better interest, with many giving over 1% as interest rates are slowly rising. This will give you the same federally insured account with much better return on the money you park there.
Diversify by Investing in Mutual Funds or ETFs
When I first started investing I made sure to diversify by using mutual funds. Mutual funds are a company that handles all of the investing for you. They compile all of the money from the participating investors and then distribute that money based on the focus of the mutual fund. Some mutual funds invest the money into specific types of funds, like technology.
If you’re looking to put your money into a mutual fund, Ally Invest is a great place to do that. You can easily open a Roth IRA account and put your $5,000 to work in your fund choice. You will want to do some research on the funds and how they have performed over the last one, three, and ten years. Many funds have decades of history, where you can see how they have done over your entire lifetime.
One downside to mutual funds is that they usually have a fairly large minimum to get started investing. You may only be able to invest in one or two with your 5,000 dollar investment.
These large initial deposits, that are required for most mutual funds, have acted as a deterrent for many people wanting to diversify their portfolio, and that is why ETF's have become a very popular alternative.
The difference is that ETFs are traded on the stock market just like a single stock would be. This means you can buy much smaller pieces of these funds instead of having a large initial investment.
Currently the top brokerage for ETF investing is TD Ameritrade. While you can invest in ETFS with any of the top online brokerage accounts, TD Ameritrade allows you to invest in over 100 different ETFs for no trading fee. $5 a trade can add up, and that money is definitely better working for you.
Invest in the Stock Market
When you think of investing, you probably think of the stock market. Putting your money in stocks can give you the best reward, but it also comes with some risk. The idea of trading stocks can be downright terrifying for new investors, and even for some older investors. There are a few tools that you can use to simplify the process and make the most of your $5,000 investment.
More from GFC, Below
One of the best ways that you can start your stock trading journey is by opening an account with Ally Invest. They have one of the best all-around services for trading stocks. They continue to offer excellent customer service and low fees ($4.95 per trade). Not only that, but they will also offer several quality tools to help you make smart decisions with your money.
If you want to invest in the stock market, but don’t want to be troubled with hand picking each investment, look no further than Motif. Motif is a website that will allow you to buy a bundle of 30 stocks (known as a motif), and these stocks all revolve around one central theme, like medical technology.
There are two big advantages to Motif over picking individual stocks. The first is that each motif will only cost you a $9.95 fee to make the investment.
Second, you can purchase fractional shares of stocks. Some well performing stocks will cost you $100 a share or more. This would only allow you to buy 50 shares or less with traditional stock purchases. With fractional shares, you can break your investment up more broadly, buying only part of a single share if you want.
Invest in Yourself – Pay Down your Debt
There's not a better feeling than getting rid of all your debt. After graduating college, I had credit card and student loan debt and I was constantly feeling the weight of having those payments every month.
Thankfully, by finding a girlfriend, who is now my wife, that also hated debt we were able to formulate a game plan to get all of my debt paid off. When I wrote that last payment to get rid of my student loans, it was one of the most freeing feelings I've ever experienced. When you have $5,000 the temptation is to invest because it's feels like a good decision to be making money, but I promise you having that stress from debt lingering will never go away.
Once you go debt free you never go back but you have to get there first.
Every investor is different, but in many cases, paying off debts can help you save thousands of dollars in the future (which you can use to invest much more). I know, paying off your debt isn't the sexiest way to invest your $5,000, but it could be one of the best options. Let's look at an example to see just how effective paying off your debt can be.
Let's say that you have credit card debt that equals right at $5,000 and an interest rate on those cards of 15%. That translates to $70 every month in interest payments. The idea of investing into paying off debt is like plugging the whole at the bottom of your bucket, before you start pouring water into it. Get that negative interest out of your life so the positive interest can be more effective at working for you.
Invest in Your Kids – College Savings Accounts
Now that I have four children the thought of how much college is going to cost me and my family is very scary. Heck, it was scary after having one kid but now that I have four it's hard to ascertain how much its really going to cost.
There are very few things that I want more than to make sure my kids do not exit college with the same student loan problem that I had, but I make sure to balance that desire with making sure my retirement is secure first.
Yes, they'll be straddled with student loan debt but they'll be able to have job. If you are retired and you have no income, there's no where you can go to borrow to pay your bills and live your golden years the way that you want.
The most common way to prepare for the cost of college is to open a 529 college savings plan. These plans are also known as Qualified Tuition Programs, and they allow you to invest the money in the plan after taxes. You can withdraw that money and any investment growth tax-free, as long as you use it pay for cost associated with a college education.
Each state has its own 529 plan and every one of them has different limits and requirements for their specific plan. Many states will allow you to deduct your contributions from your state taxes, so make sure to check and see how the rules for your state plan work.
If your state does not have any incentive for investing in their 529, then I would look at opening an account with Wealthfront. Not only do they have a full 529 through the state of California, but, like Betterment, they will do all the management of the account for you.
Your kid's college fund isn't going to have an immediate return on your investment, but if you want to give your children the money to further their education, opening up one of these accounts is the best way to do that.
If your child ends up being brilliant or talented and getting their tuition paid for through scholarships, you can decide to withdraw that money and pay income taxes ONLY on the interest that was earned or you can leave the money in the account and transfer the funds to a family member in the future. This means you could have money sitting there for a grandchild or even for you if you want to pursue higher education.
Invest in Real Estate
Investing in real estate has taken on a glamorous appeal as more and more shows come out with people buying cheap, fixing up and selling real estate investments. As someone who failed at real estate, but managed to get out mostly unscathed, I can tell you the traditional investment is not for everyone.
That does not mean you cannot get in on the investment in real estate, because there are several real estate investing options for your $5,000.
The first and most traditional technique is to be a landlord. You buy the property and then find a renter. This could either be commercial or residential. Being a landlord can be the most profitable, but it can also be the most cumbersome. In most cases, $5,000 won't allow you to get into commercial properties and will only be a down payment on a much larger loan for a rental property.
Luckily, Fundrise has made it extremely simple to add real estate to your investment portfolio. Fundrise allows you to buy notes in different real estate investments that go through scrutiny by various real estate experts, and only 2% of the people that request loans through Fundrise get approved.
Not only does Fundrise 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 boasts an impressive average ROI of almost 7% in 2016. Unless you want to be a hands-on landlord, this is an excellent way to utilize that money that you have sitting around.
Regardless of if you're a new investor or a seasoned pro, it's vital that you make the best decision for your money. Thanks to the internet, there are a bunch of different ways that you can put your money to work. Your investment portfolio is going to secure your financial security.
Take your time, do your research and find the best place for your $5k investment. This is a great opportunity to have a lasting impact on your future or that of your family.