With $5,000, most individuals begin to strategize how to earn some interest on their investments.
It’s too early to consider long-term investments like stocks, bonds, and even certificates of deposit. However, most banks and savings accounts will offer some interest on this amount of money.
It isn’t the same return, yet $5,000 is usually enough to cover a few month’s worth of expenses.
Consequently, the absolute priority with $5,000 is to ensure there is a liquidated rainy day fund with little to no exposure to market conditions.
Invest in 401k match
If your employer offers a dollar-for-dollar match, you’ll want to raise your contribution percentage to invest in your 401k. This decreases your take-home pay, but you can use the $5,000 to supplement the missing money from your paycheck.
Free money. Regardless of how much your employer matches, this is free retirement money.
Tax-deferred. Contributions are made with pretax dollars, which lowers your tax bill for the year. But you’ll pay taxes in retirement when you withdraw funds.
Can’t use funds until retirement. You’ll pay a penalty if you withdraw 401k funds before you’re 59 and a half.
Limited investment options. 401k plans use simple investment vehicles like stocks, bonds and cash.
Can’t invest funds directly. 401k contributions are deducted straight from your salary, so you can’t make a one-time, lump-sum contribution.
Invest in a Roth IRA
A Roth IRA is a retirement account that offers notable advantages such as:
Contribution limit. The maximum contribution limit for a Roth IRA is $6,000 in 2019, so investing $5,000 means you’ll capitalize on benefits like compounding interest and tax-free growth.
Tax-free growth. You pay taxes upfront, which means you won’t pay taxes when you withdraw funds.
Penalty-free withdrawals for qualified expenses. You can withdraw funds without penalty before age 59 and a half for college expenses and first-time home purchases.
Income limits. You can’t contribute to a Roth IRA if your modified adjusted gross income is over $122,000 a year.
Not tax-deferred. You pay taxes upfront when you contribute to a Roth IRA.
Must open account yourself. Unlike a 401k that’s started by your employer, you’re responsible for researching and opening a Roth IRA.
What is modified adjusted gross income (MAGI)?
MAGI is used to determine if you qualify for certain tax deductions and retirement plans. Unfortunately, MAGI isn’t listed on your tax return. Calculate it by taking your adjusted gross income, which is listed on your return, and adding back in certain deductions and accrued tax-exempt interest, such as:
Student loan interest
Social Security payments
Income from a US savings bond
Foreign housing deduction
Invest with a robo-advisor
A robo-advisor is an automated investment platform that makes portfolio recommendations based on a series of questions it asks about your goals, risk tolerance and timeline.
Low fees. Robo-advisors typically have lower management fees than traditional advisors — some even as low as $0.
Accessibility. With a robo-advisor, you can manage your account straight from your mobile device or computer.
Maintenance-free. Many robo-advisors maintain your account through automatic tax-loss harvesting and rebalancing.
Limited personalization. A robo-advisor makes recommendations based on algorithms and calculators, which can be somewhat generic.
No face-to-face interactions. No matter how advanced robo-advisors get, they’ll never be a true replacement for financial advisors.
Our pick: Betterment
Choose a risk profile and let Betterment create a diversified portfolio customized for you.
While you may find some real estate properties or private real estate investment trusts (REITS) looking for a $5,000 investment, you’re better off choosing publicly-traded and public non-traded REITs since they typically offer lower investment minimums.
Good for beginners. REIT investors don’t manage any property, so it’s an easy way to get started in real estate with minimal experience.
Low minimum deposits. Many REITs have opening deposits of less than $1,000.
Dividend payments. Receive a regular cash flow in the form of monthly or quarterly dividends.
Diversification. Instead of investing in a single property, REITs allow you to diversify with many different properties nationwide.
Volatile. Most REITs are publicly traded, so their value fluctuates with the stock market.
Less flexibility. You have less control over REITs than you would with an individual property.
Different than direct investing. With REITs, you’re investing in real estate stock, which is different than directly investing in a property.
Our pick: Streitwise
Streitwise offers a beginner-friendly way to invest in commercial real estate.
Cassidy Horton is a writer for Finder, specializing in banking and investments. She has a Bachelor of Science in Public Relations and a Master of Business Administration from Georgia Southern University. Cassidy enjoys educating people about financial services, exploring the Pacific Northwest and watching endless reruns of The Office.
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