The Best Way to Invest $5,000

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.

© CreditDonkey

The investing landscape is more diverse than ever, which means more ways to earn.

But with so many investing options, how do you choose the right one for you?

In this guide, review some of the best ways to invest $5,000, plus a few unique ways to grow your money and three important investing mistakes to avoid.

Before You Start Investing

Before you start investing, make sure your finances are in good shape. Here are a few things you’ll want to focus on before growing your wealth.

Pay down your debtsIf you have existing debt with a high interest rate (higher than 9%), it’s best to pay that down first.

Any interest that high can easily cancel out what you earn from investments. On the other hand, debt with low interest rates and a fixed term (like a car or federal student loan at 4%) may not be a cause for concern. Be sure to review your existing debts first.

Create a healthy emergency fundMost experts recommend having 3-6 months’ worth of expenses stashed away in something like a high-yield savings account.

It’s important to set up and maintain an emergency fund for unexpected situations like losing a job, medical emergencies, or fixing things around the house. Make sure your emergency fund is well-funded before you start investing.

Get a retirement plan in placeAsk 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 before investing your $5,000 in other ways.

In addition to a 401(k), consider other tax-advantaged retirement accounts like a traditional IRA or a Roth IRA.

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. Consider Real Estate Investing

Risk level: Moderate – HighGood for: Alternative investing with low correlation to the stock market

Looking for a 5-year turnaround with high growth potential? Consider investing in real estate via crowdfunding or through real estate investment trusts (REITs).

In many cases, you can even earn dividends or rental income in addition to any returns you’d get when the property sells.

Fundrise is the best real estate investing platform for smaller investors. You’re automatically invested in a diversified portfolio of projects across the US. They do all the acquiring and managing of the properties, so it’s a completely passive investment.

From 2017 to 2021, Fundrise had annualized returns that ranged from 7.3% – 23%.[2]

Pros and Cons of Real Estate Investing

  • High potential returns
  • Fairly quick turnaround (6 months – 5 years)
  • Big selection of platforms
  • Can be risky
  • Minimums can be high
  • Money is “tied up”

2. Invest in Stocks for high potential growth

Risk level: HighGood for: High potential growth

Investing in the stock market is a popular way to grow your money. When you’re buying stocks, you are buying small pieces of the company.

Although it’s a popular choice, investing in the stock market can be risky, especially if you are not familiar with the market.

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However, the stock market does offer a variety of securities. Some offer lower risk with a low reward, others are higher risk and high potential reward.

Pros and Cons of Stocks

  • Easy to buy and sell
  • Stay ahead of inflation
  • Access your money quickly
  • Low buy-in
  • Can be volatile
  • Takes time to research
  • No guarantee of returns

3. Diversify Instantly with Mutual Funds

Risk level: ModerateGood for: Instant diversification

Mutual funds are similar to stocks in that you’re basically investing in shares of a company.

However, when you buy a share of the mutual fund, you actually hold a stake in multiple companies. This can be a good way to diversify your portfolio and lower overall risk.

Mutual funds are usually purchased directly through mutual fund companies, like Vanguard or Fidelity, or through brokerages, like TD Ameritrade.

Pros and Cons of Mutual Funds

  • Tax advantages
  • Helps diversify investments
  • Less volatile than individual stocks
  • Some expenses ratios high

4. Add a low-risk Bond to your portfolio

Risk level: LowGood for: Risk-averse investors, people looking to diversify a high-risk portfolio

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 cities and states to fund public projects
  • Treasury, purchased directly from the U.S. government, also called T-bonds

In addition to steady returns from 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.

Pros and Cons of Bonds

  • Very low-risk
  • Fixed returns
  • Multiple term/bond options
  • Low returns
  • Money is “tied up”

5. Try Robo-Advisors for hands-off returns

Risk level: Moderate – HighGood for: Investing beginners, people who want to be hands-off

Since professional financial advisors usually come with a hefty price tag, you may not 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.

Pros and Cons of Robo Advisors

  • Ideal for beginners
  • Lower fees + minimum balances
  • Easy to get started
  • No advanced tools, usually
  • Can’t personalize your investments

6. Dabble in Cryptocurrency

Risk level: Very highGood for: Younger or risk-friendly investors

Interested in getting into the crypto world? Luckily, it’s never been easier than it is right now.

Research a coin you want to buy (Bitcoin and Ethereum are two popular examples) and buy your desired amount on an exchange.

From there, you’ll want to consider a crypto wallet to keep it safe. You can even track your investments with a portfolio tracker.

Pros and Cons of Cryptocurrency

  • Blockchain tech has huge potential
  • Some platforms very beginner-friendly
  • High potential returns
  • Extremely volatile
  • High risk of loss
  • Security concerns

7. Open a CD for easy, guaranteed returns

Risk level: LowGood for: Modest, low-risk returns

CDs (certificates of deposit) can offer steady returns at 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.

Pros and Cons of CDs

  • Very low-risk
  • Returns are predictable
  • Good selection of accounts and terms
  • Low returns
  • Limited liquidity
  • Inflation risk

8. Give your retirement savings a boost

Risk level: Low – High (depending on the investments you choose)Good for: Retirement planning

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If you already have a retirement account like a 401(k), IRA, or Roth IRA, adding your $5,000 to it can help it earn even more.

Plus, depending on which account you have (or want to open), you may even get some tax benefits.

Traditional IRA contributions are tax-deductible when it’s time to fill out a tax return, while contributions made to a Roth IRA can be withdrawn tax-free once you’re ready to withdraw (after age 59 ½).[3]

Pros and Cons of Retirement Accounts

  • Money grows tax-free
  • Employer matching
  • Safety for retirement
  • May pay taxes upfront
  • Max contributions can be low

9. Take Advantage of High-Yield Savings Accounts

Risk level: LowGood for: Low-risk, short-term investing

If you want a shorter-term investment with minimal risk, consider depositing it into a high-yield savings account. Just keep in mind that current rates on high-yield savings accounts are pretty low.

Online savings accounts like CIT Bank’s Platinum Savings 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.

Pros and Cons of High Yield Savings

  • Higher interest
  • Low opening deposits
  • Fewer fees
  • Rates dependent on the Fed
  • Difficult to deposit cash

10. Jump start your kid’s college fund

Risk level: LowGood for: Parents or grandparents

Whether you just welcomed a new baby or have a little one in middle school, jump-starting their college fund can be a smart move. After all, anything will help reduce the burden of student debt.

Consider setting up a 529 College Savings Plan. This allows you to invest after-tax money into the plan. From there, the money will grow tax-free over time and will be ready to use for costs associated with higher education.

Pros and Cons of 529 Savings Plans

  • Tax-free growth
  • Can come with tax benefits
  • Less student debt later on
  • Plans usually charge some fees
  • Must be used for higher education

Unconventional Ways to Invest $5,000

Looking for more unconventional ways to build wealth? Whether you’re hoping to increase the value of your home or build a sustainable passive income stream, one of the ideas below may be perfect for you.

Start Your Own BusinessMany 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.

Try Fulfillment by AmazonIf 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.

Invest in $5,000 in YourselfYou 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.

Remodel Your HomePutting $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.

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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.

Start a PodcastThe 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.

Start a BlogSimilarly, 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 SchemesYou 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 a 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.

  • GamblingYes, 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.

What the Experts Say

As part of our series on investing, CreditDonkey asked a panel of industry experts to answer readers’ most pressing questions. Here’s what they said:

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.

Unlock the Potential of Real Estate Investing

If you’re considering the best way to invest $5,000, don’t overlook the power of real estate.

Fundrise, a popular real estate investing platform, allows you to become a property investor without needing a fortune. By pooling your money with other investors, you can own a share of commercial and residential properties across the United States.

This diversification helps reduce risk and can generate passive income through rental income and property appreciation.

Plus, with Fundrise’s easy-to-use platform, you can start your real estate investment journey confidently, even as a beginner. Discover the potential of real estate investing with Fundrise and make your $5,000 work harder for you.

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