While $5,000 might not be a life-changing sum of money, investing it wisely can make a massive difference down the road.
In this guide, you will find six best ways with varying degrees of risk for how to invest $5,000, the pros and cons of those approaches, as well as what to consider before you start investing.
What kind of investor are you?
Before you decide how to invest $5,000, answer these questions:
- What is my investing goal? Is it to save for an upcoming expense, such as a car or a down payment for a house, or are you saving for retirement? This is important because a short-term goal will require a different approach to a long-term goal;
- What is my risk tolerance? Investing is risky, and your risk tolerance will determine how you allocate your assets;
- How much do I want to be involved? Are you an active or passive investor? If you focus on the long term and aren’t just hoping for short-term gains, both techniques can be worthwhile. However, we recommend newbies employ passive strategies rather than trying to beat the market. What’s more, financial advisory services might come in handy if you’re just starting out.
Ultimately, your age, risk tolerance, investment time horizon, and financial goals all factor into your investment style. And knowing who you are as an investor will help you adjust your method and determine what are the best investments as you age and your financial goals develop.
Before we proceed further
Best ways to invest $5,000
Congratulations, you have an extra $5,000 burning a hole in your pocket. But, instead of spending it, why not put the money to work, determine the best ways to invest 5,000 dollars, and use this as an opportunity to start your investing journey?
Depending on how you want to invest, $5,000 is plenty to get started with. And there is a myriad of best investment options available to you. But ultimately, the best way to invest 5,000 dollars is to choose the financial vehicle (or combination of them) that meets your specific needs to help you achieve your future financial goals.
Below you will find our pick for the six best ways to invest $5,000:
- Stock market;
- Index funds and ETFs;
- Real estate — REITs;
- Individual retirement accounts (IRAs);
- Certificates of deposit (CDs);
- Government bonds.
Now, let’s examine these methods in more detail.
1. Stock market
In this section: How to invest $5k stocks?
Investment type: Long-term growth
Risk Level: Varies
Broker to consider: Regulated, secure platform eToro.
Disciplined investing in the stock market over decades is typically the best way to build long-term wealth. And while returns can fluctuate from year to year, persistently reinvesting your profits will result in compound gains, which will see your original investment grow even juicier as time passes.
For instance, the S&P 500 delivered a 26.89% return in 2021 amid the post-pandemic recovery. And though it was down a whopping -19.44%a year later, in 2022, it’s still averaging 10.21% since its inception in 1957.
Once you know which stocks you’re interested in buying, you can shop for an investing platform. For the hands-on types, a brokerage account, such as eToro or Interactive Brokers, will do. However, for those who need more assistance, opening an account through a robo-advisor will be the more convenient option. In addition, consider hiring a financial planner or investment advisor if you’re new to the stock market.
Pros and cons of investing in the stock market
- Investments in the stock market have the potential to generate much higher returns than more conservative asset classes such as bonds;
- Income from price appreciation as well as dividend payments;
- An excellent way to stay ahead of inflation;
- Stocks are highly liquid instruments and can easily be converted into cash;
- You can start investing with as little as $10;
- Setting up an account with an online broker is uncomplicated and fast.
- Though stocks are lucrative investments over the long term, they may not do well over your chosen investing period;
- Generating profits generally takes decades, not weeks or months;
- The volatility of the stock market may take you on an emotional rollercoaster, i.e., refrain from obsessively monitoring your investment;
- A portfolio of individual stocks will require you to regularly follow various company health indicators as well as overall market conditions, which can be highly time-consuming.
2. Index funds and ETFs
In this section: How to invest $5k in index funds and ETFs?
Investment type: Long-term growth
Risk Level: Varies
Broker to consider: Regulated, industry-leading low-cost trading platform Interactive Brokers.
Low cost investing
Index investing is a passive investing strategy in which investors purchase exchange-traded funds (ETFs) or mutual funds that track major market benchmarks and hold them over a long time frame in an effort to match the financial index performance.
The three most widely tracked indexes in the United States are:
- The S&P 500;
- Dow Jones Industrial Average;
- Nasdaq Composite.
Pros and cons of investing in index funds and ETFs
- Because you won’t be actively trading means transaction costs (commissions, etc.) are kept at a minimum;
- Index investing is one of the simplest and best ways of diversifying your portfolio;
- A buy-and-hold strategy won’t generally result in a capital gains tax for the year;
- Following a benchmark index is effortless compared to managing a portfolio of individual stocks, which requires constant research, reading the news, and adjustment;
- A hands-off investment approach that can eliminate many of the biases and uncertainties that arise when you pick stocks individually.
- Index funds follow their underlying index regardless of the state of the markets. In short, if the market conditions are poor or in a recession, the index funds will also follow the benchmarks downward, and vice versa, upward in a bull market;
- While buying and holding (HODL) can be lucrative in the long haul, evening out the risks will also flatten out the rewards;
- Many index funds are formed on a market capitalization basis and give higher weights to large-cap companies. For example, if market giants like Amazon.com Inc. (NASDAQ: AMZN) and Meta Platforms Inc. (NASDAQ: META) experience a weak quarter, the entire index will be significantly impacted.
3. Real Estate – REITS
In this section: How to invest $5k in real estate?
Investment type: Long-term growth and diversification
Risk Level: Medium
Broker to consider Regulated multi-asset investing platform eToro.
We’ve covered the stock market. Now let’s see how you can invest in real estate.
As you might have realized, $5,000 might not be enough for a down payment for an investment property. However, $5,000 is enough to get exposure to real estate if you consider investing in REITs.
REITs are publicly-traded companies that own, operate, or finance income-generating real estate. REITs (as well as REIT mutual funds and REIT ETFs) can be bought or sold via a brokerage account, making them the most liquid real estate investment out there.
Pros and cons of investing in REITs
- Provide some of the highest dividend income on the market;
- Allow for value appreciation and rental income without the usual work that goes into buying, managing, and selling properties;
- Returns over the past 20 years have exceeded the S&P 500, as well as the rate of inflation;
- High liquidity (unlike physical real estate investments);
- Offer a ready-diversified real estate portfolio for any budget without requiring much time or expertise.
- Because 90% of a REITs taxable income is paid out as dividends, only 10% gets reinvested into the REIT to buy new holdings, resulting in slow growth;
- Dividends are taxed as regular income;
- Highly susceptive to interest rates;
- Some REITs might have high management and transaction fees.
4. Individual retirement accounts (IRAs)
In this section: How to invest $5k in IRAs?
Investment type: Long-term growth and retirement
Risk Level: Low
An IRA will be your go-to retirement option if your employer does not offer retirement plans or if you want different investment offerings than those provided by your workplace.
IRAs let you invest in various asset classes, including bonds, stocks, ETFs, and mutual funds.
There are two kinds of IRAs: a traditional IRA, which gives you an upfront tax deduction, and a Roth IRA, which allows for tax-free retirement withdrawals. In 2023, contributions of up to $6,500 (or up to $7,500 for those over age 50) are allowed per year into an IRA, leaving you with an additional $2,500 to $3,500 to invest elsewhere.
Pros and cons of IRAs
- Tax-free growth on your assets;
- Tax deductions, whether upfront with a traditional IRA or on withdrawal with Roth IRAs;
- A wider range of investment options compared to workplace retirement plans.
- Contributions are limited;
- Penalties for premature withdrawal.
5. Certificates of deposit (CDs)
In this section: How to invest $5k in CDs?
Investment type: Short-or long-term saving goals
Risk Level: Low
A certificate of deposit is an FDIC-insured savings product that holds a fixed sum of money for a set period of time in exchange for interest. Unlike in savings accounts, the deposited funds must remain untouched for the totality of their term or risk penalty fees.
Investing in CDs is an excellent option for short-term savings goals with an established time horizon. And while less liquid than regular savings accounts, they work well if you know when you’ll need the money.
Pros and cons of investing in CDs
- Particularly advantageous during high-interest rate periods for short-term saving goals;
- Highly secure way to store money since CDs are FDIC-insured;
- Predictable and virtually guaranteed returns;
- CD laddering techniques will allow you to leverage changing interest rates and create liquidity.
- Penalties on early withdrawals;
- Rates may not be high enough to outpace inflation;
- Investing in the stock market can typically generate much higher returns;
- Less liquidity than savings, money market, or checking accounts.
6. Government bonds
In this section: How to invest $5k in bonds?
Investment type: Long-term growth and diversification
Risk Level: Low
Bonds are debt instruments in which investors lend the issuer the purchase amount of the bond in exchange for an interest rate during the bond’s life as well as the face value of the bond at maturity.
Government bonds are issued by federal governments and are among the safest investments around, generally carrying a risk-free rate of return. However, this lower risk typically also translates into lower yields. In the US, federal bonds are known as Treasuries, consisting of:
- T-Bills: Mature in 1 year or less (short-term), are issued at a discount;
- T-Notes: Mature in 2 to 10 years (medium-term) and pay periodic interest;
- T-Bonds: Mature in 10 to 30 years or longer (long-term) and pay periodic interest (longer maturities typically have higher coupon rates);
- TIPS: Bonds that are indexed to inflation.
All treasury securities have zero default risk since they are guaranteed by the full faith and credit of the United States government. Remember, treasury yields can fluctuate depending on the market and economic conditions.
Pros and cons of bonds
- Reliable income stream in the form of interest;
- No risk of losing your original investment since treasuries are backed by the government;
- Can be sold before their maturity in the secondary market;
- They can be bought individually or through mutual funds or ETFs.
- Typically produce substantially lower returns than stocks;
- Returns may not be enough to beat inflation;
- In a rising interest rate environment, fixed-rate bonds will underperform in comparison to newly issued bonds;
- Selling before maturity can result in a loss.
How to safely invest $5,000 — things to consider
Though you may be keen to begin investing your $5,000, you must first assess your financial standing as a whole and ensure the following factors are satisfied:
- High-interest debt is taken care of: Ensure you have repaid any high-interest debt before investing. That includes credit card debt and debt from other loans, such as payday loans. For instance, the average credit card interest rate in 2022 was 19.42%, significantly higher than the average annual stock market return. Low-interest debts such as mortgages or auto loans, on the other hand, do not need to be repaid before you start investing;
- You have an emergency fund set up: Establish an emergency fund in case of unexpected expenses, such as medical bills, car repairs, or job loss before you start investing. A good rule of thumb for most people is to put aside six months of living expenses in your banking deposit account where there’s no risk of losing principal, like a savings or money market account. Importantly, having that cash available will also mitigate the need to withdraw money from your portfolio, use high-interest credit cards, or take out loans.
Then, as you begin your investment journey, make sure to:
- Diversify: To spread your risk and protect yourself from large losses, allocate investments across various financial instruments, industries, and other categories. In addition, a diversified asset allocation is essential because it has a massive impact on whether you will meet your financial goal. For example, if you don’t add adequate risk to your portfolio, your investments may not earn a significant enough return to meet your goal;
- Spread out your investments: After investing the $5,000, keep investing. We recommend utilizing a dollar-cost averaging (DCA) strategy, in which the total amount to be invested is divided into periodic purchases over a period of time (e.g., you put $100 every month in your index fund regardless of market conditions). Spacing out your investment this way can lower the overall impact of price volatility and decrease the average cost per share;
- Stay wary of fraud: Scams are getting increasingly sophisticated. Fraudsters are often particularly articulate and charming as well as financially knowledgeable, with credible websites, testimonials, and documents that are difficult to distinguish from the real deal. But as always, if it sounds too good to be true, it probably is. That’s why researching and understanding an investment is important before giving someone your money. Start by looking for the company’s financial statements on the Securities and Exchange Commission’s (SEC’s) EDGAR filing system. Check out the Financial Conduct Authority (FCA) list of warning signs here, as well as the SEC’s list of questions to ask about your investments here.
Before you invest the $5,000, take care of the basics, such as paying off your credit card debt, setting up a retirement plan, and funding an emergency fund.
Then, as you decide where to park the money, have a specific set of goals in place. As your circumstances change, however, adjust your investment strategy but remain set on building wealth for the long term.
Ultimately, what’s most important is that you start! If you’ve been delaying it for many years, now, with the extra $5,000, is the best time to finally do it. Remain patient, the money will double, and it won’t be long until you find yourself researching how to invest $10k.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
FAQs about how to invest $5,000
How to invest $5,000 for a quick return?
We recommend you don’t look for short-term gains and invest for the long term.
How to invest $5,000 short-term?
Investing in short-term CDs or bonds in a high-interest rate environment might be an excellent option for short-term savings goals with an established time horizon.
How to invest $5,000 wisely?
Your best way to invest $5,000 is to spread it across many financial instruments, including stocks, index funds, and REITs, as well as safer alternatives such as bonds or CDs. You can invest it as a lump sum, after which you can add onto your investment by dollar-cost averaging. However, before investing, pay off any outstanding high-interest debt first.
How to invest $5,000 in real estate?
The best way to invest $5,000 in real estate is to invest in REITs. This option provides you with a ready-diversified real estate portfolio, high dividend yields, and high levels of liquidity (particularly compared to physical real estate investments).
How to invest $5,000 in the stock market?
The best way to invest $5,000 in the stock market is to invest in ETFs or mutual funds that follow major market benchmarks.