Investing is one way to build wealth over time, putting your money to work on your behalf.
It’s possible to start investing even when you don’t have a lot of money, but what if you have a windfall? Here’s how to invest $5,000 and take your finances to the next level.
1. Tackle high-interest debt
“From a strictly financial standpoint, if you have high-interest credit card debt, it makes sense to pay it down,” said Ben Huber, a financial expert and co-owner of financial education website DollarSprout.
According to Huber, it’s important to look at how much interest you’re paying right now in relation to your potential returns. Paying off debt with a 15.99% APR results in a better return than investing in something that might only give you between 5% and 7% in annual returns.
You can get started by using the debt snowball or debt avalanche method to figure out which debt to pay down first. Invest the entire $5,000 toward debt reduction, then rely on a good debt repayment plan to help you pay off the rest faster.
2. Beef up your retirement account
Rich Guerrini, president and CEO of PNC Investments, suggested using the money to grow your wealth in a tax-advantaged retirement account. If you haven’t maxed out your contributions, investing that $5,000 into your 401(k) or an individual retirement account (IRA) today can make a big difference down the road.
“On top of that, many employers will match a portion of your contribution to a 401(k), helping it make even more of an impact on your retirement well-being,” Guerrini said.
To make an extra one-time contribution to your 401(k) or another employer-sponsored plan, talk to a payroll or human resources representative to find out your next steps. You can open an IRA using an online robo-adviser such as Wealthfront, FutureAdvisor, or Betterment.
3. Help others with peer-to-peer lending
Many people think of peer-to-peer (P2P) lending as a source for personal loans, said Erin Baker, a fiscal planning and budgeting administrator. But Baker uses P2P loans as a way to build wealth.
With highly rated borrowers, she said, you won’t see the same return, since these are “safer” bets — more likely to repay their loans. But Baker can boost her returns by including some loans to those with riskier credit profiles.
“I can diversify that $5,000 into 100 loans of $50 each, or 50 loans of $100, with different levels of risk,” Baker said. “And I get to help other people at the same time.”
4. Get into the rental game
“You can invest $5,000 as a down payment for a property that has the capability for you to rent out spare rooms or an apartment,” said Elizabeth Colegrove, a real estate investor and founder of The Reluctant Landlord.
Colegrove recommended using a Federal Housing Administration (FHA) loan to get started since you can get approved with a down payment as low as 3.5%, allowing for the purchase of a property that costs up to $142,857. You do have to live in the property for at least one year when you get an FHA loan, so you’ll have to account for that in your planning.
“Try to diversify the rentals if you can,” said Colegrove. “Use some of it for Airbnb and some for long term. Your renters are paying the mortgage, freeing up your money to keep investing or use the money for other things.”
5. Boost your business
Claudia Pennington and her husband, Garrett, run DIY Marketing, consulting with other business owners to help them move to the next level. When they were trying to figure out how to invest $5,000, they settled on using the money to produce a marketing video for their business.
“We think it will help us grow, providing returns beyond our initial investment,” said Pennington. “Plus, every dollar we invest now can mean another $3 or $4 in returns when we go to sell the business in a few years.”
Pennington recommended looking at your business and seeing where you could invest a little more to see results.
Targeted marketing plans, new equipment, or getting a virtual assistant are all ways you can tweak your business to free up your time to focus on growing your income more effectively.
6. Buy index ETFs or mutual funds
Another way Pennington would invest $5,000 is in an index exchange-traded fund (ETF) or mutual fund. It’s a boring approach to your money, she acknowledged, but it’s a way to see long-term results.
She likes dividend-paying ETFs, which offer investors a share of profits on a regular basis.
“Rather than spending the dividends, we just reinvest them back into the ETF,” Pennington said. “That helps the portfolio grow faster, building wealth.”
Many investment brokers offer their services online, making it easy to find low-cost index ETFs and mutual funds.
7. Invest in the future
“There is no better time than the present to invest in your child’s education,” said Guerrini. He pointed out that the recent tax law expanded the purpose of 529 plans to include expenses at private schools for grades K-12 besides college.
You can open a 529 account with your state and invest $5,000 in your child’s future with tax-free growth, reducing the need for student loans. Plus, some states offer tax deductions on your state income taxes for contributions to the state plan.
How to invest $5,000 — and grow your wealth
How you decide to invest $5,000 depends on your long-term goals. Stop and think about where that money could do the most for your finances, whether that’s paying down high-interest debt, putting the money into real estate, or even investing in yourself or your business.
There are so many ways to use the money, but investing it in a way that provides returns or helps free up other funds to help you reach your goals is much more satisfying than blowing it on consumer items that only lose value.
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