March 19, 2020

How to Invest $5,000

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What can you do with $5,000? You can turn a nest egg into passive income. Learn how to invest $5k, plus 3 investments to avoid.

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Can I get rich with just $5,000?

Compound interest is the fastest way to grow your wealth. It works like a snowball rolling down a hill-gaining momentum as it goes. At the top, it doesn't seem impressive, but over time you start to see the change.

Start investing early for the biggest gains.

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

  1. Pay down high-interest debts first
  2. Invest in mutual funds or ETFs
  3. Consider low-risk bonds
  4. Open a CD for steady returns
  5. Leverage a robo-advisor for hands-off investing
  6. Invest in REITs and earn rental income
  7. Try peer-to-peer (P2P) lending
  8. Consider investing in yourself or your home

Investing can feel invisible, which stops some people from getting started. Let's be honest, it's going to frustrate you when everybody else thought ahead and you blew it off. There's still plenty of time. The key is start now.

Don't get left behind.

Before You Start Investing

Before you start investing, make sure your finances are in the right condition. You may need to use that $5,000 to get on better financial footing before you focus on building more wealth.

First, pay down your debts
If you are carrying debt with a higher interest rate, like credit card debt with a 24% APR, it might be wise to pay that down first. Accruing more debt by paying interest means the power of compounding is working against you. Revolving debt, like that from a credit card, is especially damaging to your personal finances.

On the other hand, debt with fairly low interest rates and a fixed term may not be as much of a cause for concern. An example of this is a car loan with a 4% interest rate.

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

Essentially, you should not start investing if your investments won't earn as much as you are paying in interest. Otherwise, you would be losing money. For example, if your investments earn 5%, but you are paying 24% on credit card debt, you are losing ground. However, if you are earning 5% on investments but paying 4% on your debt, you're in better shape.

Second, make sure your retirement is on track
Ask yourself two questions:

  1. Do you have a 401(k)?
  2. Does your employer match contributions?

If your employer is matching contributions to your 401(k) account, you should be taking advantage of them. To avoid leaving money on the table, contribute the maximum amount that your employer will match.

401(k) Company Match: Some employer's vest their contribution to your 401(k). This means you'll likely have to work there a certain number of years to receive a percentage (or the whole amount) of their match. But you'll always get 100% of your contribution, regardless of how long you stay with the company.

In addition to a 401(k), consider other tax-advantaged retirement accounts like a traditional IRA or a Roth IRA. A traditional IRA allows you to deduct the total amount from your taxable income that year. A Roth IRA accepts post-income tax contributions. When you withdrawal funds from a Roth IRA, you don't have to pay tax on the gains.

Consider making the maximum contribution to these accounts before investing your $5,000 in other ways.

How to Invest $5,000

Once you are in good financial health with managed debt and a solid retirement plan, you can focus on how to invest $5,000.

Your money can work for you in several different ways. Here are a few suggestions:

  1. Invest in Individual Stocks
    Investing in the stock market is a popular way to try to grow your money. When you're buying stocks, you are buying small pieces of the company.

    In general, the stock market can be a risky place to invest your money, especially if you are not familiar with the market. However, the stock market does offer a variety of securities. Some are lower risk with low reward, others are higher risk and high potential reward. To keep costs low, look at lower-cost brokers like Ally.

  2. Invest in Mutual Funds
    Mutual funds are similar to stocks in that you're essentially investing in shares of a company. However, with mutual funds, you are buying a share of the fund, which holds a stake in multiple companies.

    Many investors like to invest in mutual funds because they believe the added diversity of the fund's holdings lowers their risk.

  3. Invest in Bonds
    If you want to invest $5,000 with little risk, consider investing in bonds. With bonds, you may earn a lower rate of return, but the likelihood of default is very low.

    Overall, bonds tend to be more predictable than stocks. There are three main types of bonds:

    • Corporate, offered by corporations looking to raise capital
    • Municipal, issued by towns, cities, and states to fund public projects
    • Treasury, purchased directly from the U.S. government, also called T-bonds

    In addition to steady returns on interest rates, bonds can also grow in value. If overall interest rates are declining, your bond may be increasing in value as investors want the higher yield that your bond offers.

    However, the value of your bond could just as easily decline if interest rates increase.

  4. Leverage a Robo-Advisor
    Since professional financial advisors usually come with a hefty price tag, you may not meet be able to hire one with just $5,000. However, you can utilize robo-advisors. Robo-advisors offer you personalized recommendations based on your investment goals and risk tolerance. Plus, most robo-advisors will automatically rebalance your portfolio.

    There are plenty of robo-advisors out there to choose from. In your search, consider Betterment, which has no minimum deposit requirement.

  5. Open a CD
    CDs (certificates of deposit) can offer steady returns for essentially no risk because they are secured. Investing $5,000 in a CD meets the account minimum requirement for most accounts.

    Typically, online banks provide higher rates than traditional banks but, as usual, it pays to shop around. Keep in mind that the money you earn, while low risk, may not be as much as you could earn from other investments.

      CIT Bank

      CIT Bank Term CDs

      • Up to 1.30% APY
      • $1,000 minimum opening deposit
      • No monthly maintenance fee
      • FDIC insured
      • Daily compounding interest
      TermCD Rates
      6 Month0.72% APY
      1 Year1.25% APY
      13 Month1.25% APY
      18 Month1.25% APY
      2 Year1.25% APY
      3 Year1.25% APY
      4 Year1.30% APY
      5 Year1.30% APY

  6. Take Advantage of High-Yield Savings Accounts
    Savings accounts are another way to build money slowly but steadily. If you want to take on minimal risk with your $5,000 investment, consider depositing it into a high-yield savings account. Online savings accounts like CIT Bank's Savings Builder tend to offer higher interest rates than traditional savings accounts. (Take a look at our CIT promo code page to learn more.)

    This allows you to earn regular returns with virtually no worry about losing money. However, like CDs and bonds, the rate of return can be lower than other types of investments, such as stocks.

  7. Start Your Own Business
    Many people have founded successful businesses with less than $5,000. However, it takes a lot of hard work and careful planning. If you are tired of the 9-to-5 grind and you have a good idea for a business, develop a business plan.

    You can lean on sources such as the U.S. Small Business Administration for advice on how to get started.

  8. Consider Real Estate Investing
    While you may not see many options for properties less than $5,000, you can still invest in real estate through other investment vehicles like real estate investment trusts (REITs).

    You can invest in a share of a REIT just like you would invest in a stock. REITs can provide profits through the rental income they collect from properties or property appreciations.

  9. Invest $5,000 in Yourself
    You can also use your savings to take an educational course that can improve your career and your earning prospects. With this strategy, you could easily turn $5,000 into much larger earnings.

    Here are some ways you can invest $100 in yourself:
    • Take online courses: Learn or sharpen a skill with professional courses, webinars, or workshops.
    • Find a mentor: Does your favorite subject expert offer one-on-one coaching via Skype? Getting advice from a mentor can help develop your career in new, profitable ways.
    • Buy a pair of good exercise shoes: It's important to invest in your health. You'll likely have more energy and feel better about yourself.

  10. Try Fulfillment by Amazon
    If a full-scale business is not for you, consider starting a smaller retail business with Fulfillment by Amazon. Essentially, you ship the items you want to sell to Amazon, which then fulfills any orders you get and ships your products to your customers for you.

    Rates vary by the size of the package shipped and the amount of warehouse space you'll need, but $5,000 should be plenty to get a small operation going.

  11. Delve into Peer-to-Peer Lending
    You can use your $5,000 to help others while earning returns through peer-to-peer lending. Two popular peer-to-peer lending platforms are Lending Club and Prosper.

    In peer-to-peer lending, you provide the funds for investment, and the platforms are responsible for officially funding the loans, collecting payments, and paying you back. With $5,000, you could fund several lower-level borrowers and earn back your investment with interest.

    The risk of default is a possibility with peer-to-peer lending. Be sure to look into what each platform requires of its borrowers (such as minimum credit score).

  12. Remodel Your Home
    Putting $5,000 into home renovations can actually be a form of investment, especially if you plan to sell your home soon. Homes with fresh kitchen or bath upgrades have higher resale values than ones with outdated appearances.

    Keep in mind that not every upgrade to your home pays off the same. Be sure to research which improvements will pay off the most in the long run.

  13. Start a Podcast
    The podcast world is increasingly difficult to break into, but there is still room to make money. You should be prepared to dedicate a lot of time and energy to producing regular content.

    However, if it's something you enjoy doing, you may find the advertising and sponsorship deals can be lucrative.

  14. Start a Blog
    Similarly, blogs have the potential to make you a steady stream of income through advertising, and $5,000 is more than enough to start one. With that money, you may be able to support yourself for a month or two while you get the content going.

    You'll likely need money to buy a domain name and web hosting service. Or, you may need to invest in equipment like video recorders, microphones, cameras, or a better computer.

3 Investments to Avoid

Some types of "investments" aren't really investments at all. In fact, you could easily lose your $5,000 if you put it into a risky scheme.

Here are some investments to avoid when looking to invest $5,000:

  • Pyramid Schemes
    You may have seen businesses that promise to make you rich only if you can recruit others to join. If you're asked to pay to join a business with that type of model, be aware that it may be a pyramid scheme, which can't provide the win-win situation to everyone.

  • Penny Stocks
    Stocks less than $5 a share may seem like a great deal. Plus, $5,000 would go a long way in buying cheap stocks and your investment could produce massive profits.

    Usually, though, stocks like this aren't profitable at all. Companies that offer penny stocks are usually very small and aren't required to disclose their financials. They may be trying to raise capital to grow, but they're not always successful in the long run.

  • Gambling
    Yes, it's possible to win big by gambling with $5,000. But people very rarely do. Statistically, you are much more likely to lose your money when you gamble. That statistic applies whether you are playing in a casino or buying a lottery ticket.

    The odds are not in your favor, so, while gambling may be entertaining, it's a poor investment choice.

Bottom Line

Fortunately, you have many options for how to invest $5,000, from investing in the stock market to launching your own business. Weigh the pros and cons of each to find the best strategy for you.

Remember, before you invest, give your finances a health checkup to make sure you are in the best position to start investing. And be aware of promising risky investments like penny stocks and pyramid schemes that may not be what they seem.

The bottom line is that the sooner you can start investing your funds in a safe way, the more you can benefit from the rewards of your investment.

Note: This website 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. You do not have to use our links, but you help support CreditDonkey if you do.

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