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How to invest $5,000
These five investment options can help you get the most out of your $5,000 right now.
You’ve got $5,000 to invest, and you’re wondering where to put your money for the best return. Though it isn’t enough to retire on, $5,000 is plenty to build a strong foundation for your investment portfolio.
5 best ways to invest $5k right now:
How you invest your money largely depends upon your goals and risk tolerance. But to help you get an idea of where your money might work the hardest for you right now, I’ve put together the following five investment options to consider.
1. Buy stocks
Why it’s a good option now: If you’ve maxed out your retirement accounts or just want to use that $5,000 to try your hand at trading stocks, consider opening a taxable account with a broker. Your money won’t be locked up until retirement, and many brokers run valuable promotions for new customers.
What to watch out for: Brokerage accounts are taxable. You’ll have to pay taxes on any dividends or interest earned during the year. You’ll also have to pay capital gains tax on any earnings when you sell a security. The amount of tax you’ll need to pay on capital gains depends on how long you owned the investment.
Investments held for less than a year are taxed as ordinary income. Investments you’ve held for longer than a year are taxed at 0%, 15% or 20% depending on your taxable income and filing status.
2. Buy cryptocurrencies
Why it’s a good option now: Bitcoin recently topped $48,000, its highest level since April 2021. Ethereum is climbing back up to its high of over $4,000 in May 2021. Investing in cryptocurrency can be a good option if you want to gain exposure to the global demand for digital currency.
What to watch out for: Cryptocurrency is extremely volatile. Bitcoin jumped from around $10,000 in September 2020 to over $64,000 in April 2021 before losing half its value three months later. So just as quickly as you can make money, you can also lose it.
3. Earn interest with a high-yield savings account
Why it’s a good option now: Interest rates on high-yield savings accounts took a major hit in the last couple of years. In 2019, you had no trouble finding a high-yield savings account that paid over 2% APY on balances. Today, these rates are mostly between 0.4% and 0.65% APY.
While rates on these accounts likely won’t see previous levels anytime soon, high-yield savings accounts still offer much more rewarding interest rates than the 0.06% national average that you’d find at a traditional brick-and-mortar bank.
If you’re looking for a safe, liquid place to store your $5,000 while earning decent interest on your money, a high-yield savings account might be a good option.
What to watch out for: The Federal Open Market Committee announced back in July 2021 that it doesn’t plan to raise the fed funds rate any time soon, and savings account rates are loosely based on this benchmark rate. So it might be some time before high-yield savings accounts return to previous highs. But since more and more online banks keep popping up, competition should keep these rates at an attractive level.
4. Invest in a traditional IRA
Why it’s a good option now: A traditional IRA comes with tax advantages and more freedom over how you choose to invest your money compared to a 401(k). Like a 401(k), you can still invest in ETFs and mutual funds, but you can also invest in bonds, FDIC-insured CDs and individual stocks. An IRA is still a retirement account, but you don’t need an employer to have one.
Contributions you make to a traditional IRA are tax-deductible for the year you make them, so you can lower next year’s tax bill with the contributions you make now and through the rest of 2021. Plus, the maximum you can contribute to an IRA is $6,000, so you could put that entire $5,000 to work in an IRA.
What to watch out for: If you have a 401(k) through work, there are limitations to how much you can deduct. And the $6,000 maximum contribution limit could prove too low if you want to make additional investments beyond that $5,000.
5. Check out precious metals
Why it’s a good option now: Precious metals are a great way to diversify your portfolio and hedge against inflation and the stock market. The spot price for gold has pulled back since reaching a high of around $2,000 per ounce in August 2020, making it more affordable today. Likewise, silver and platinum prices are at some of the lowest they’ve been in about a year.
What to watch out for: When investing in precious metals, you’ll pay the spot price plus a premium. Since the seller sets the premium, you’ll want to compare premiums from multiple sellers to make sure you’re getting the best value. And to make money on your investment, the spot price will need to increase enough to cover the premium you originally paid plus any costs associated with selling the metal.
Precious metals securities are also subject to fees and commissions.
How $5,000 can grow
With $5,000 you can start spreading your money between different asset classes, which offer different average returns but also different risks. Here’s a look at how it might grow in three common investment classes.
|$5,000 saved or invested||Savings account||Bonds||Stocks|
For this table we assumed:
- A 1% annual return on a savings account, CD or money market fund (which is optimistic these days);
- An average 6% return for bonds or bond funds.
- 10% on stocks, the market’s long-term annual return.
Bond returns vary widely based on bond types, and the stock market has down years while individual stocks can go to zero. So consider these benchmarks only and consider risk as well as return.
Before you invest
Before you invest that $5,000, there are some money moves you should first consider:
- Build an emergency fund: An emergency fund is there to cover you in case you suddenly lose your source of income or incur a major financial setback. Many experts say to save three to six months of necessary expenses.
- Establish a rainy day fund: A rainy day fund is a smaller version of the emergency fund and is meant for small, unexpected expenses, like a new appliance or car repair. This amount could be anywhere from $500 to a couple thousand.
- Pay off debt: If the interest you’re paying on your debt is more than the return you can make on your investment, you’re losing money. If you don’t want to wait until you’re entirely debt-free to start investing, at least consider paying off your high-interest debt, like credit cards, first.
- Hit other savings goals: If you’re planning a vacation or a major purchase, consider putting that $5,000 into a high-yield savings account.
If these options aren’t where you want to park your $5,000, here are two alternative investments:
- Robo-advisors. Robo-advisors like Betterment or Wealthfront can be a good choice for anyone who wants to take a hands-off approach to investing. Most charge a small advisor fee, but since they’re usually automated, this fee is often a fraction of the cost of a professionally managed portfolio.
- Real estate: Investing in real estate is easier than ever with platforms like Fundrise and DiversyFund. Both require minimum investments of just $500, and both have low annual fees.
Compare investment platforms
Whatever you choose to invest in, you’ll need a platform to put to use. Consider the ones below as well as others mentioned in this story.
*Signup bonus information updated weekly.
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