Here are the best ways to invest $5,000.
Whether you’re a new investor with a $5,000 windfall, a steady saver or a seasoned financial pro, there are many ways to invest. Several ways to invest $5,000 are tried-and-true, well-known options. Others are a bit more obscure and might not immediately come to mind when brainstorming how to put your money to work. There’s simply no perfect answer when asking, “What’s the best way to invest $5,000?” This will depend on your age, risk tolerance, financial situation and time horizon for the investment. With that in mind, here are seven ideas for how to deploy your next four-figure sum.
Invest in yourself first.
If the earliest days of the 2020s have one underlying investing takeaway it’s that markets will always have an occasional curveball waiting — and many everyday investors might strike out unexpectedly. There’s no doubt that you need to build a portfolio of financial holdings if you want to retire comfortably; the best returns are usually found investing in yourself first. That can take the form of online courses, continuing education or allocating resources to build a website touting your professional accomplishments. Whether it’s networking, stepping up your sartorial game or spending to make sure you can work from home efficiently, invest in the things within your locus of control first — things that affect your own career, business or aspirations.
Invest like Warren Buffett.
When wondering, “How do I invest my money?”– it’s reasonable to look to one of the smartest investment minds of all time. Warren Buffett, CEO of Berkshire Hathaway (ticker: BRK.A, BRK.B), instructed his estate to invest in an S&P 500 index fund and Treasury bonds for his heirs. For new investors or anyone who believes that the U.S. economy is strong and major U.S. and global brands are likely to grow into the future, this is easily one of the best ways to invest $5,000. Investors can look at the Vanguard S&P 500 Index Fund Investor Shares (VFINX) and the Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX) in percentages that reflect their comfort with risk. Aggressive investors will tilt toward a stock fund and conservative investors will deploy more money into bonds.
Invest in high-quality dividend stocks.
For current income and long-term capital appreciation, investing in stalwart dividend stocks is a time-tested strategy, says Gregory Powell, deputy chief investment officer at Miller/Howard Investments in New York. Well-established dividend stocks have tended to outperform the S&P 500 over longer periods of time. Investors can implement this approach by screening for companies with growing dividends or buying a dividend aristocrat fund like the ProShares S&P Dividend Aristocrats ETF (NOBL) or the ProShares S&P Technology Dividend Aristocrats ETF (TDV). Investing in dividend-paying stocks also tends to be one of Warren Buffett’s favorite tenets. He has touted assets that produce steady, regular income for shareholders for many decades now.
Fund a 529 plan for your child or a relative’s education.
“A 529 college savings plan offers among the best methods of investing $5,000, by allowing for tax-deferred growth and tax-free withdrawals of the initial investment and providing the foundation for educational opportunities that can dramatically increase lifetime earnings,” says Judith Corprew, executive vice president at Patriot Bank. These state-sponsored accounts offer a way to invest in a variety of stock, fixed income or guaranteed return investments within one’s own state or another. The money within the account can be withdrawn to pay for tuition, fees, room and board, books and other school supplies. The withdrawals, if used for designated educational expenses, are federally tax-free, and if the owner invests in his or her own state’s plan, the withdrawals are also free of state tax.
Fund an IRA or 401(k).
Investors of all shapes and sizes have a couple goals that are nearly universal: People want to retire, and they’d rather not pay taxes if they don’t have to. Tax-advantaged retirement accounts like 401(k)s and individual retirement accounts, or IRAs, can help you work toward both of those goals at once. You should always contribute at least the minimum required to get an employer 401(k) match, if offered, and practically anyone with taxable income can set up an IRA of some sort, from self-employed contractors to employees of small businesses and Fortune 500 firms alike. It’s never too early to start setting yourself up for your golden years, and retirement accounts offer one compelling way to invest $5,000.
Invest in a low- or minimum-volatility ETF.
Many investors already have an understanding of broad market stock and bond funds, which were touched upon earlier. Investing in some mix of low-fee, market-tracking fixed income and equity funds is a great hands-off way to ride steady economic growth over the long run. But even those diversified stock funds can be pretty volatile. For anyone interested in taking the road less traveled and committing to that path for the long run, low- and minimum-volatility exchange-traded funds offer an impressive bargain and have arguably been overlooked by investors at large. Some of the biggest funds have outperformed the S&P 500 over long periods of time while taking less risk, all by investing in a diversified portfolio of traditionally lower-volatility stocks. The iShares Edge MSCI Min Vol USA ETF (USMV), in terms of year-to-date returns, has nearly rebounded from the mid-March sell-off. The fund is relatively cheap with a 0.15% expense ratio.
Fund a health savings account.
For those covered under a high deductible health insurance plan, a health savings account is a superb investment vehicle. Although designed as an account for individuals and families to save tax-free for out-of-pocket medical expenses, an HSA can also be used as a supplement to other retirement savings accounts, especially if the account owner can pay medical expenses from another source. In 2020, the law allows individuals to contribute $3,550 and families $7,100 to an HSA. Depending upon the type of HSA, owners can invest in both fixed income and equity investments, and all income and capital gains grow tax-free. Depending on the type of plan, “you can use an HSA just like a 401(k) or IRA,” says Shobin Uralil, chief operating officer and co-founder of Lively, an online HSA provider.
Here’s how to invest $5,000:
— Invest in yourself.
— Invest like Warren Buffett.
— Invest in high-quality dividend stocks.
— Fund an IRA or 401(k).
— Fund a 529 plan for your child or a relative’s education.
— Invest in a low- or minimum-volatility ETF.
— Fund a health savings account.
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Update 07/27/20: This story was published at an earlier date and has been updated with new information.