What’s the best way to invest $5000

If you happen to have $5000 set aside for investment, the best way to do this will depend on your long- and short-term goals.

Also consider: The best way to invest $1000

What is the best way to invest $5,000?

$5,000 is a good amount of money to start investing with, so consider diversifying your investment strategy by utilizing a number of different investment methods and a diverse range of assets.

You could invest money directly in the US stock market or for a slightly higher-risk higher-return strategy try the global emerging markets, invest in tax-efficient vehicles like 401k or IRA, or even open a high-yield savings account.

However, it is crucial to make sure you understand all of the different methods of investing before choosing how you wish to invest your money.

Dividend Stocks

One of the most common ways to invest in the US is the tried and tested method is to invest in stocks, and for centuries has helped canny investors such as Warren Buffet become very-very rich.

There’s no cap on how much you invest on stocks and as long as you are investing within your means it is a great way of generating a passive income. Dividend stocks are a great choice for investors thanks to the fact that dividend stocks provide two sources of return: regular income from dividend payments and capital appreciation of the stock price.

Thanks to their lower volatility and solid performance dividend stocks are very appealing for long-term investors looking to save for their retirement but dividend stocks can still be risky if you don’t know what to look out for.

Your Stocks Will Vary Depending On Your Preferences

Every app or investment platform approaches investing differently and offers their users different tools and resources on their platforms for investors to use.

Apps like Interactive Brokers and eToro offer investment themes, where an investor can put money towards a group of investments collected together under an umbrella term.

For example, an investor may want to invest in a theme like “technology”. All of the underlying investments in that theme will revolve around technology and the future, like AMD or Tesla.

Investing $5,000 in such a manner can help you set up a fleshed out and diversified portfolio right off the bat, allowing you to avoid putting all your eggs in one basket. By investing in several different asset classes, you could help protect your wealth against market downturns.

Exchange Traded Funds

An ETF is one of the best ways of investing your money with the long-term in mind. An ETF aka “exchange-traded funds” are funds that trade on exchanges, generally tracking a specific index. If you invest in an ETF you get a bundle of assets that you can buy and sell during market hours—a great way of lowering your risk and exposure and at the same time diversifying your portfolio.

Thanks to their broad exposure to market sectors, geographies, and industries they help an investor reduce risk without sacrificing long-term returns.

Secondly, generally speaking ETF funds are low cost with low expense ratios and fewer broker commissions biting into your profit margins.

Generally, speak ETFs are a solid choice for new and experienced investors. You should also consider what type of ETF you want to invest in with a choice of actively managed or passively managed ETFs available. In an actively managed ETF fund managers are directly involved in the account and as such the expense ratio is higher, as such you need to decide what your priorities are and weigh up your preferences.

In any case there is a wide range of ETFs available on the market, allowing you to pick and choose and find an option that works for you.

Investing $5,000 in an ETF is a great way to set yourself up for a long-term nest egg and to safely, though it must be stressed that low-risk does not mean no-risk, dip your toes into the world of investment.

IRA

Another savings account option well worth looking into are IRA. The IRA is a US government created plan to help workers save for retirement. Individuals can contribute up to $6,000 to an account in 2022, and those over the age of 50 can contribute up to $7,000. There are many kinds of IRAs, including a traditional IRA, Roth IRA, spousal IRA, rollover IRA, SEP IRA and SIMPLE IRA. And each have their own unique advantages that mean you are likely to find one that is best suited to you.

A traditional IRA is a tax-advantaged plan that allows you significant tax breaks while you save for retirement. Thanks to its mix of tax benefits, and the fact that it allows you to purchase an almost-limitless number of investments – stocks, bonds, CDs, and real estate it is an extremely versatile and popular choice.

A newer, and increasingly popular choice, is A Roth IRA is a newer take on a traditional IRA, and it offers substantial tax benefits. Any money taken out in retirement, that is to say at the age of 59 ½ or later, is tax exempt.

So, if you have $5,000 to invest and you are looking to save towards your pension and retirement an IRA is well worth checking out.

High-yield savings accounts

With their focus on providing above market average interest rates you can find high-yield savings accounts with rates of up to 1.5% per-annum. Conveniently some of the best ones, such as Citizens high-yield savings account, have an investment minimum of $5,000. In exchange for which you have a 1% APY and a great no fee online savings account with a reputable financial institution.

There is a lot to like in these saving accounts, and as well as being all but guaranteed a regular income you can rest easy knowing that any money you put in is insured by the Federal Deposit Insurance Corporation (FDIC) at banks and by the National Credit Union Administration (NCUA) at credit unions, so you won’t lose money. In other words, investing your money into one of these saving accounts is a low-risk win-win.

Bear in mind that each offering has different terms and conditions and as such be more to read the small print and check the fees that the banks have for running this service. Also, some people may prefer to invest in a slightly higher risk and higher reward solution, as high-yield savings account is not the best choice for those interested in short term profits.

What to think about before you invest

Before investing your money, you should consider some reasons why investing may not be for you and make sure you fully understand the risks involved in doing so. Here are some things to think about.

Saving vs investing

Simply put, investing money is much riskier than saving money. By putting your savings in designated savings accounts, you are safely storing your money with the bank or provider you choose. Your savings will not reduce in value, although they may lose purchasing power due to inflation.

Meanwhile, by investing your savings, you are potentially putting your money into companies registered on stock markets across the world, and run the risk of losing some if not all of your money, depending on the economic performance of your investments.

The positive is that investing opens up the potential to generate a higher rate of returns than cash savings would earn in interest. This way, your money has the chance to stay ahead of the dreaded inflation curve.

Debt

If you have any sort of outstanding debt, it is strongly recommended that you pay it off before deciding to invest in the stock market. Put simply, debts have interest rates and the longer you take in paying off your debt the more the greater the actual cost of the debt. The sooner you pay it off, the sooner you can stop losing money and you save a significant amount in interest. This could amount to greater savings than the returns you would have generated from investing instead.

Emergency fund

Another decision you should make prior to investing your money is whether you have an emergency fund. An emergency fund is a nest-egg set aside to help cover the costs of unexpected car-break downs, plumbing leaks, and in general to maintain your living standards should you suffer from a sudden loss of income of any large bill.

Financial professionals recommend that you have a reservoir set aside for a period of three-to-six months’ worth of essential expenditure and living expenses in this emergency fund. Giving you plenty of time to find an alternative job should you lose your income and to navigate any financially difficult period without putting yourself or your family under greater financial strain.

It is always better to be prepared for a financial emergency now than risking your capital and investing for potential gains in the future.

Your financial goals

Before making any investment decision it’s important that you set out what your financial goals are. Typically, financial professionals would recommend that you invest only if the financial goal you are investing towards is at least five years away.

When it comes to investing, the longer the better. This means that investing for personal and financial goals 10 or 15 years in the future could be a good idea, but your short-term goals are probably best saved for in cash.

Your financial situation

Before investing, you also need to plan for the fact that any money you are investing with will no longer be in circulation. In other words, you may have to cut back on certain short-term pleasures, such as a daily coffee, so make sure that you are able to live without the money you are about to part ways with. Retrieving money from the stock market in emergencies could severely damage your returns and result in a loss.

Also always remember that there is no such thing as a sure-bet, and as such never invest money that you can’t afford to lose. Investing money, especially on the stock market, comes with risks.

Your risk tolerance

Investment always has its risks. Just as with life there are no guarantees, and it is possible that you will receive the same amount as you put in, or even possibly lose money. This depends purely on the decisions you make and how your investment portfolio performs.

The chance of losing money is down to how much risk you are willing to take with your investments. This is known as your risk tolerance and will dictate what investments you put your money in.

Generally speaking, high-risk investments offer an opportunity for higher investment returns but are often more volatile in terms of stock price. In other words, you also run the possibility of losing your money.

Low-risk investments tend to give lower returns but tend to be more reliable market performs. Think of the fable of the tortoise and the hare, and in the long-term the tortoise always wins.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of US legislation, which is subject to change.