June 12, 2017

Best Ways to Invest $10,000

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What would you do if someone handed you $10,000? Would you go on a shopping spree, put it in a savings account, or contribute to the latest trendy investment?

Before you decide, consider your options. Come up with a strategy to put a reason behind where you decide to put your money - and increase your chances of making a smart decision. Here we help you come up with you strategy and the many ways you can make the most of your $10,000.

What to Consider Before Investing

Before the money burns a hole in your pocket, consider your goals and timeframe. Are you going to need to use it anytime soon (if so, avoid putting it somewhere that's too risky, especially in the short-term).

Read on to learn what you should consider.

  • Start with Your Goals
    What do you dream of doing with your $10,000? Will it fund a luxurious vacation, help you retire, or buy a house? Categorize your goals as long-term (retirement) or short-term (vacation), and go from there.

    Determine the Timeframe

    Divide your goals into categories:

    • Less than 1 year = short-term goals
    • 1-5 years = intermediate goals
    • Greater than 5 years = long-term goals

    These timelines dictate the level of risk you may want to take. Here's a basic rule: The shorter the timeframe, the less risk you can take. The longer the timeframe, the more risk you may be able to handle.

    Riskier investments tend to have more ups and downs. Do you have time to ride them out - and perhaps get a greater return? It's a key question for every investment you make.

    Risk: The chances you take with your money. It is the level of variability of your investments you can't predict. It could hurt or help your financial situation.

  • Assess Your Ability to Take Risks
    Your personality helps determine your risk level too. If you worry a lot, conservative risks may be better. Obsessing over your investments isn't healthy. They may cause you to make rash decisions, affecting your finances. If, on the other hand, you don't worry much, a higher risk may work if you're okay with potential losses. Knowing you are in it for the long run may help.

    In a perfect world, a balanced portfolio works best. It gives you a mix of risky and non-risky investments. More often than not, risky investments suffering a loss are offset by the less risky - yet consistent - investments over time.

  • Understanding Risk
    More than one factor affects an investment's risk. Understanding these common factors can help you choose the right investment:

    • Market risk: These are market conditions you have no control over. If the overall financial market suffers, even diversification (basically having that balance in your portfolio) doesn't eliminate the risk. Many types of investments suffer. It's the nature of the beast.

    • Business risk: If you invest in stocks, a corporate decision could affect your investment one way or the other. If the market perceives it as a bad decision, the stock could plummet. If the majority sees it as a good decision, the stock may skyrocket.

    • Political risk: Political events may affect the market. This pertains to domestic and foreign investments. Think about how the public reacts to major government events and decisions. These reactions often affect the financial markets.

    • Liquidity risk: The time and cost involved in converting an investment into cash contributes to the risk. The more time or cost involved, the higher the liquidity risk.

    • Concentration risk: The less diversified your portfolio, the higher your concentration risk. If you have all of your eggs in one basket, your risk increases.

    The higher the risk you take, the greater the reward. You also put your money at risk for loss. But if you wait out the loss, you may reap the reward of a higher return.

  • Evaluate the Fees
    Most people investing $10,000 don't hire a financial advisor. The fees alone would eat your profits. Instead, they handle their own investments. Even without a financial advisor, though, you may pay fees. Look closely at the fine print before choosing an investment.

    Fees you should look for include:

    • Stock trading costs: Cost of buying or selling a stock
    • Annual fees: Cost of holding an account with a particular company
    • Account minimums: Fees you pay if you don't meet the required minimum
    • Account maintenance fees: Fees to have your investment accounts at the financial institution
    • Sales loads: Fees added to mutual funds upon purchase or sale
    • Advisory fees: Annual fees paid to the investment professional assisting with your portfolio
    • 401(k) fees: Fees charged for operating and maintaining your 401(k) account

Just as you might comparison shop for large ticket items, you should do the same for an investment firm. Ask about their fees. You may even be able to negotiate some of them. Keep in mind, though, if you decide to change brokerage firms, you may face tax consequences.

If you are unsure about a brokerage firm, a great tool to use is BrokerCheck. They provide information about a broker's background, experience, and prior complaints.

Things to Consider Before Investing

Before you jump right into finding the right broker, take inventory of your financial life. Ask yourself the following:

  • Do you have a lot of personal debt?
  • Do you have a 401(k)?
  • Do you have an IRA?

You may want to get a handle on these things first. We talk about each item in detail below.

  • Pay Down Your Debts
    Investing doesn't sound like paying debts down, but it plays a role. It's a way to push down the rate of return. Here's an example.

    You can obtain a 5% rate of return on your investment portfolio. But you have $5,000 in credit card debt and you pay 23% interest. If you invest your $10,000 rather than paying the $5,000 off, you lose 18%. Instead, pay the credit card debt off. You can invest the remaining funds using one of the strategies below.

    Rate of return is the profit off an investment. Banks write it as a percentage. On a $1,000 investment, if you make $50, your rate of return equals 5%.

    Keep in mind that some interest is tax deductible. Credit card interest isn't one of them. Home mortgage interest is, though. This puts you in a different boat. In this case, you look at your after-tax rate of return. Here's an example.

    You pay a 5% mortgage interest rate, and you are in the 28% income tax bracket. You only pay 3.6% in mortgage interest after taxes. If you find an investment with a rate of return higher than 3.6%, it makes sense to invest rather than pay the mortgage down. Once you pay down your debts, we recommend you focus on your retirement plans.

  • Plan for Retirement
    Ask yourself two questions:

    • Do you have a 401(k)?
    • Does your employer match contributions?

    If you don't have a 401(k), you should. It becomes even more important if your employer matches contributions. Even if they match just 10% of your contributions, it's free money. Take it. If you have a 401(k) but haven't maximized the amount your employer will match, start there. Your windfall instantly appreciates just by you holding a job.

    Tip: You have to use your income to invest in your 401(k); you can't use "outside money." You can get around it, though. Increase your contributions with your HR department. This decreases your take home pay. In the meantime, put the $10,000 in an interest-bearing savings account. Supplement the money you deducted from your paycheck with the money in your savings account.

    What if you maxed out your 401(k) contributions or you are self-employed? You can contribute to an IRA. You don't lower your tax liability immediately with every type of IRA. But you do get a tax break when you file your income taxes. In 2016, you could contribute up to $5,500 in an IRA. You can invest it all at once, unlike a 401(k). Even if you have a 401(k), you may want to consider funding an IRA as well. Once you plan for retirement, you can consider other investment options.

Investment Options

Now we get to the fun stuff - investing. You've done your homework. You have set goals and timeframes. You understand risk and potential fees. You made sure you are out of debt and have proper retirement accounts. Now it's time to invest. Here are some traditional options for investing $10,000.

  • Invest in Mutual Funds
    Mutual funds offer diversification. They operate differently than stocks. Rather than investing in one company, mutual funds diversify between stocks, bonds, and other short-term investments. A mutual fund can invest in many securities all at once. They should be a mix of risk and non-risky investments. This gives you the offset you need when a risky investment doesn't perform well.

    First, choose a brokerage. Charles Schwab, Vanguard, and Fidelity are among some of the most popular. Read their reviews or ask for references from relatives. After making a choice, look at their available mutual fund programs. Refer back to your list of goals. Are you saving for retirement or something more short-term? This will help determine the right mutual fund.

    You may hear terms like target date funds and index funds. Distinct goals, such as buying a house in 5 years or retiring in 20 years, may do better with target date funds. These funds invest according to the time left in the investment. The longer time you have, the more risk you can take. As you near the target date, conservative investing makes more sense. The fund manager adjusts the investment accordingly.

    Longer-term goals, such as retirement, do better with index funds. These funds mimic a specific index, such as the S&P 500. They offer diversification and a long-term investment strategy. The returns on index funds closely mimic market returns. They require very little management and may have lower fees.

  • Try a Robo Advisor
    If you think $10,000 isn't enough for a financial advisor to take you on as a client, consider a robo advisor. This automated advisor - really, a software program - does the work for you.

    Again, going back to your list of goals, you provide the necessary information. The program then uses its algorithms to create your investment portfolio. The questions you answer pertain to your risk level, goals, and timeline. They don't invest your money until you approve the proposal, though. You can follow along with the investments as you wish.

    Betterment stands out as the leader in the industry. They offer three pricing options. The lowest level, however, doesn't require an account minimum. They do charge 0.25% of your account balance per year. Read our in-depth review on Betterment to learn more.

    Tip: Robo advisors are not people. You won't get personal advice or even a person to speak to in some cases. If you prefer conversations with a person, you can pay for a higher tier with a company like Betterment. This gives you access to a professional advisor along with the basic Betterment services.

  • Invest in Stocks
    You don't need a stockbroker to trade stocks. Today, you can use an online brokerage account, such as E*TRADE, among many others. Choose a company offering a simple interface and resources for new investors. If you are new to trading stocks, don't focus on commission fees. Unless you buy and sell stocks often, they won't have a large impact on your return. As you become more experienced and make more money, though, you may want to pay closer attention to commission fees.

    Once you choose an online broker, create an account. As a customer, you may have access to more resources. Take your time reading about each company. Read news, stock performance histories, and professional forecasts. Then choose one or two stocks to start your investment. Hold off on investing a lot until you have a good handle on the process.

    Once you have a handle on investing in stocks, create a plan. Have a set amount you want to invest. Also, set a threshold for the amount you can lose. This way you can remove the emotion from the process. Seeing your money plummet can force you to make a hasty decision. Have a plan in place and stick to it. Remember, riding out the lows? This is a perfect example.

10 More Ways to Invest $10,000

If you prefer something other than the ordinary investment tactics, don't worry. We have 10 more ways to help you invest your $10,000. Some are admittedly ordinary, such as CDs and savings accounts. Others help you think outside the box.

Sometimes investing means something other than putting the money in an account. Maybe you invest in yourself or in a business. Your rate of return may be much higher when you consider different options.

  1. Look at CD rates
    If you are looking for a risk-free investment with decent returns, look at CDs. We recommend using an online bank rather than a traditional bank. They tend to offer higher rates (at least high concerning CDs). With CDs, the longer you invest the money, the higher the APY (Annual Percentage Yield). Also, the higher the account minimum required, usually the higher the APY. Today, you may see a rate of return between 1% and 1.5% on 1-year CDs, but the rates can go up to as much as 2.25% for longer-term products.

  2. Fill a savings account
    When we talk about savings accounts, we don't mean the account at your local bank where you have a checking account. They probably offer measly returns. We mean online savings accounts where you could obtain rates as much as 10 times higher than your local bank. You should consider a few things before you invest. Make sure the FDIC insures the bank. Also, read the fine print regarding withdrawals. Make sure you have access to your money when you need it. Some banks may charge fees for withdrawals. Check for required account minimums too. If you prefer a debit card, look for banks that offer this service.

  3. Give peer-to-peer lending a shot
    Peer-to-peer lending is a somewhat new method of investing. It's a good choice for investors who don't want to deal with a financial institution. Instead, you become the lender. By joining a P2P platform, you can connect with borrowers all over the world. The benefits of P2P lending are the high rate of return and lower risk. As an investor, you may pay an origination fee, closing fee, or an annual fee. Lending Club and Prosper are the top two P2P platforms operating today. They work as the intermediary between you and the borrower. They fund the loans (after you pay them), collect payments, and help with litigation should the borrower default. You can diversify your risk by lending money to multiple borrowers at once. Your $10,000 could fund many borrowers with low borrowing needs.

  4. Try a new investment platform
    If you prefer a little more control over what you invest in, consider Motif. As the investor, you create your own mutual fund. You also have the option to invest in someone else's motif (if creativity fails you). These are different from pooled funds, like mutual funds. With Motif, you own the stocks within the investment, but you determine the dollar amount invested. You don't buy a specific number of shares. As a bonus, you don't pay administrative or management fees. Motif is a hybrid of the robo advisor and a DIY investment strategy. You control certain factors, such as the industries you want to invest in, and Motif does the rest.

  5. Invest in yourself
    Did you ever think of investing in yourself? Taking online courses, going back to school full-time, and hiring a personal coach are a few ways you can do this. No matter the avenue you take, you gain new knowledge and skills. You can take these skills out into the world and make money. Your new skills may provide new opportunities for employment, especially if you add a designation to your title. Certain designations offer you the opportunity to be listed in online directories, such as a CPA. This may result in more business and earnings for you. It's also a great way to enter a new industry. The money can help you make smarter decisions, try new opportunities, and make more money.

  6. Start your own business
    Another way to invest in yourself is to start your own business. If you are tired of the 9-to-5 grind and want to answer to no one but yourself, this could be your chance. You may need to combine #5 and #6 for the best outcome. Unless you have a lot of experience in the industry, a little coaching or education could help you succeed. We recommend visiting the Small Business Administration's website before starting. They offer many resources and steps for beginners and even the experienced business owner.

  7. Try Fulfillment by Amazon
    Fulfillment by Amazon is like other selling sites, but easier. You supply the items you sell, but you ship them to Amazon. You market the products on Amazon's website. Once sold, Amazon ships the items for you. It's the simplest form of selling products online. You don't need coding, graphic design, or social media experience for success. You have access to Amazon's large marketplace of buyers, and you only do a fraction of the work involved with other selling sites. It almost provides immediate gratification. You can sell new or used items. You can also choose between the individual account (a free account) and the professional account ($39.99 per month).

  8. Fix up your home
    Your home may be your largest investment. It may also be outdated or need a facelift. Certain improvements can have a direct impact on your home's value. You don't need to make drastic changes to see a large improvement in the value. In fact, major bathroom and kitchen remodels often don't have a large return on investment. New siding, new roof, and new windows often pay off better. Small changes within the kitchen or bathroom, such as the addition of granite countertops, often pay off. Another change with a large ROI is updating the home's curb appeal. You may even get bonus points for energy efficient changes you make. Depending on the tax year, you may get a tax break for the new changes made.

  9. Start a blog
    If you aren't sure about quitting your 9-to-5 job just yet, but have a passion for the DIY, consider starting a blog. Many people use this as a side gig. They write when they have time and become affiliate partners with businesses to make money. Starting a blog won't cost $10,000, but having some capital helps. For starters, you can further your education before starting. Take classes on starting a blog or get in-depth training in your chosen industry. The more you have to talk about, the better, so education helps. You'll also need money for the domain name, platform, and website hosting. You may also need to upgrade your computer equipment, camera, microphone, and video equipment.

  10. Start a podcast
    If writing isn't your thing, but you love to talk, consider starting a podcast. It works like a blog, but you don't host a website. You will need a host for your podcast, though. When you first start, your free website may offer enough support. As you gain more followers, you may need greater capabilities. Too many listeners can cause glitches in your podcast. This could be bad for your following. Today, SoundCloud and Amazon S3 top the charts in podcast hosting. No matter which you choose, read the fine print. Some services, including Amazon S3, charge a base fee, but it increases as your following increases. Just like a blog, though, you can monetize your podcast. You can sell advertising time within the podcast or let a company advertise on your host page. This can help you afford the podcast hosting fees.

The Bottom Line

Your $10,000 has a promising future. Stop and think about your plans. Then answer the following questions.

  • Evaluate your situation: Do you have a retirement account? Do you contribute the maximum amount to it?
  • Are you in debt? Is your interest rate higher than any rate of return you could get?
  • Do you understand mutual funds, robo advisors, and stocks?
  • Do you want to try something unique?

Knowing your situation will help you make a more informed decision. Many investment options have small minimum requirements and low fees. Shop around and look at your options to make the most of your $10,000.

Disclaimer: Opinions expressed here are those of the author's alone. Please support CreditDonkey on our mission to help you make savvy financial decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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