How to Invest $5,000 Wisely - 10 Smart Ideas
Many people have the misconception that they need hundreds of thousands of dollars to start investing. However, this isn't true, as you can begin investing with a few thousand dollars too.
Investing is beneficial for your future, but you need to choose the best places to invest to get the highest returns. You can even make good returns on low-risk investments, but they need to be right for your financial goals.
This guide will discuss how to invest 5000 dollars, even if you're a non-professional investor.
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6 Conservative Ideas to Invest $5,000
The best way to invest 5000 dollars is to go for conventional investment vehicles since you'll easily find a plethora of resources and tools for them online.
Get Rid of Debt at High Rates
Before you can invest in anything, it's important to get rid of your debt, especially if it's at a high interest rate. Credit card debt is one of the worst things you can have since it has high interest rates.
If you already have debt, make good use of your available funds by paying it off. Otherwise, any investment return you make will be used to pay off your monthly debt payments.
Here are some tips:
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Pay off more than your minimum payment. In this way, you can pay off your debt faster and pay lower interest rates overall.
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If you don't have good control over your credit score, avoid opening new lines of credit, as this will negatively impact it further.
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Set up a budget and stick with it.
Index ETFs - Wise Option for Non-Professional Investors
Warren Buffet recommends index exchange-traded funds as the best investment option for beginners. When talking to CNBC, he said, "Consistently buy an S&P 500 low-cost index fund," because it's a great way to boost retirement savings.
In this regard, the trick is not to opt for the right company to invest in. Rather, you should buy shares of all companies via the S&P 500 and remain consistent in your investments.
On top of that, managing individual stocks is more costly, taking a large chunk of what you earn. Meanwhile, ETFs free you of this hassle as you can invest in hundreds of companies with minimal overseeing.
Historical records from 1926 to 2018 show that the average annual return on ETFs is 10% to 11%, which is ideal for non-professional investors. An example of an index ETF with significant performance is Invesco Dynamic Semiconductors ETF (PSI).
With net assets of $769.26M and performance over one year of 61.9%, the fund makes a great investment opportunity.
First Trust Small Cap Growth AlphaDEX Fund (FYC) is another remarkable option with substantial growth and performance of 52% over a year.
It tracks the Nasdaq AlphaDEX Small Cap Growth Index and offers exposure to stocks with high potential for growth. Most of the stocks in the fund are from the information technology sector, followed by consumer discretionary and healthcare.
The main advantages of index ETFs are portfolio diversification, lower costs, trading flexibility, and tax benefits. Meanwhile, their shortcoming is that they offer lower dividend yields.
Research ETF Market Closely
Besides index funds, there are hundreds of other funds that you can invest in. You can use these funds to invest in gold, stocks, and real estate with as little as 5000 dollars.
Here are some examples:
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Money Market Funds: These funds invest in short-term financial instruments with a duration of one year or less. Your money is invested in treasury bills, commercial paper, certificate of deposit, and government bonds. Since they're safer investments, money market funds have a lower potential return. You can opt for riskier funds that offer higher returns, but it's important to only go for want you can afford to lose.
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Equity Funds: Equity Funds invest in stocks. They grow faster than fixed income or money market funds, so there's a higher risk. You can choose different equity funds, such as growth stocks, income funds, small-cap stocks, mid-cap stocks, and large-cap stocks.
The main advantages of funds for investors are risk reduction, fair pricing, portfolio management, and dividend reinvestment. However, these funds have poor trade execution and come with high fees.
Consider Robo Advisors
If you're wondering how to invest 5000 dollars, a robo advisor can help you. A robo advisor is a financial service company that provides automated, algorithm-based portfolio management services at a minimal cost.
Robo advisors use computer algorithms to manage clients' portfolios by selecting appropriate investments based on the investor's risk profile and their goals.
Some notable robo advisors include:
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Wealthfront
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Betterment
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Vanguard Digital Advisor
By utilizing technology, robo advisors provide access to professional money managers in an affordable way. The biggest advantage of this approach is that you don't need to select appropriate investments for yourself.
Besides that, robo advisors invest your money in index funds or ETFs, which are often inexpensive and have low fees. However, the shortcoming of robo advisors is the lack of personalization.
Additionally, there is no face-to-face collaboration, so you can't convey your money problems as you would with a traditional financial advisor.
Roth IRA Account
A Roth IRA account is one of the best options to invest 5000 dollars or more. It is a long-term investment plan that offers tax benefits and has no withdrawal charges, which means you can take out your money anytime without penalty.
The main advantage of the Roth IRA account is that you don't have to pay taxes on your investment returns.
You can fund a Roth IRA from different sources, including:
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Rollover contributions
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Regular contributions
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Transfers
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Spousal contributions
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Conversions
The benefit of a Roth IRA account is that you get tax-free retirement income. Plus, you get early access to your money with minimized ageist withdrawal rules.
On the flip side, the cons include:
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Lower limits for contributions
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Early withdrawal penalties
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Limited investment types
You can open a Roth IRA account at major US online brokers and robo advisors, such as ETrade, J.P. Morgan, SoFi, and Betterment. The minimum account you need to keep in your IRA accounts for all these platforms is $0.
Individual Stocks
For many investors, the best way to invest $5,000 is to put it in stocks. However, before you invest in any company's stocks, you need to research to find out if it will be a profitable pick.
Pay attention to the company's business model and understand its financials. You need to thoroughly research the market and the company's competitors to be able to assess its prospects and identify opportunities.
The main advantage of investing in individual stocks is getting shareholder benefits and dividends. The dividend is the cash reward you get at the end of the year as a shareholder based on the company's profit for the financial year.
The downside is that there's no middleman, so you need to manage your portfolio yourself. Additionally, you need to monitor your stocks regularly to keep track of the market and its impact on your portfolio.
Where to Buy Stocks?How to Invest $5,000 Dollars for Quick Return? 4 options with higher risks
The investment options we discussed earlier were relatively low-risk. As a rule of thumb, the lower the risk, the lesser the potential for higher returns. Here are some risky options that have a potentially faster return.
Copy Trading
If you're thinking, how can I double 5000 dollars, copy trading can be the way to do so. Copy trading gives less experienced investors an opportunity to copy trades of experienced ones.
People who are experienced in investing make money by knowing when and what to buy, selling it at the right time, and making a profit.
For less experienced investors, this is not that easy. They often rush into buying volatile assets or invest very late just before the price goes up, which leads to losses rather than gains.
Meanwhile, experienced traders follow set strategies and make decisions accordingly. In copy trading, you essentially copy the trading trajectory of an experienced trader to make profits.
👍 The pros of copy trading include:
• Ability to make money without extensive knowledge of investments
• Ability to network with expert traders
👎 On the other hand, the cons are:
• Difficulty in finding the right platform for copy trading
• Difficulty in finding a reliable trader to copy
High-Return Funds
High-return funds are mutual funds that invest in stocks paying high dividends. A high dividend means the stock pays a considerable amount of money to its shareholders, often more than 10% and sometimes up to 30%.
Since these shares pay out such hefty amounts, investors rely on those dividends as passive income sources. For instance, American Century Focused Dynamic Gr Inv is a high-return fund with a year-to-date investment of 7%, which is considered good.
Similarly, Fidelity Growth Company K, with a year-to-date return of 11.74% and a five-year average return of 14.1%, is another good investment. Investing in these funds is bound to give you higher returns.
But it's important to note that higher profits are associated with greater risks. You should only opt for high-return funds if you have a high risk tolerance.
Crypto Trading
Crypto trading has become a promising business venture. The crypto market has the potential to generate high returns in a short time, which is why it's becoming so popular among investors.
If you're open to taking risks for higher gains, then this investment option could be what you are looking for.
However, it's important to note that the crypto market is still very volatile because cryptocurrencies are unregulated. If you want to go for this investment option, do so with proper research and knowledge of the market.
👍 The pros of crypto trading include:
• Potential for high returns
• Protection against payment frauds
• Immediate international transactions
However, the major downside is the lack of regulation and high volatility in the crypto market. Plus, the fear of cyber hacking is another consideration for investors.
Best crypto to invest inPenny Stocks
A penny stock is a small company's stock, trading at under $5 a share. Investing in penny stocks is a risky gamble because many of them do not meet the basic requirements to be listed on a public exchange, which means they are unregulated.
These companies often lack transparency, and their stocks are hard to track, which makes it even riskier for investors.
However, if you want an opportunity for quick returns, penny stock trading might be what you are looking for. The potential for high returns is always there because the stocks are cheap.
The main advantage of penny stocks is that they fit your budget. Plus, they give rapid gains.
Meanwhile, the cons include:
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Higher volatility
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Losses can be high
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Prone to scams
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Risky markets
3 Tips to Invest $5,000
Now that you know the best way to invest 5000 dollars, here are some tips to make the investment journey simple for you.
Define your Goals
Having a goal in mind will help you decide how to invest 5000 dollars. A goal is the starting point for any investment. You need to know why you're investing, how much you can invest, and what you want to achieve with this investment.
For instance, you might want to invest for early retirement. If you want to be financially independent sooner in life, you may want to start investing early.
Similarly, you might want to invest for the following reasons:
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Start a business later in life
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Reach your financial goals
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Save for retirement
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Grow your wealth
Determine the Amount for Investment
Once you have a goal in mind, you can determine the amount you want to invest. Make sure you choose an amount that's not too burdensome for you. After all, you have to use a huge chunk of your monthly income on necessities.
According to experts, if you're a 30-year-old, you need to invest $1400 every year for 35 years with a 3% yearly return to be a millionaire when you reach the age of 65.
Likewise, if you invest in an asset with a 6% yearly return, you just have to invest $740 every year to make one million by retirement.
Typically, you should invest 10% to 20% of your after-tax income in bonds, stocks, or other assets. It's best to select the right percentage of your income to invest based on your expenses.
For instance, if you spend 50% of your investments on domestic expenses, you can save 20%, use 10% for entertainment and dining, and invest in the remaining 20%.
Open an Investment Account
An investment account with a major US bank should be sufficient for most of your investment purposes. An investment account is the best place to consolidate all your investment transactions. It's also an excellent way of keeping track of your investments.
An investment account, whether it's a trust or individual retirement account (IRA), also offers tax benefits. Here are some good options to try:
| Broker | Best For | Minimum Investment Amount | Investment Assets | IRA Account | Robo Advisory | |
|---|---|---|---|---|---|---|
Copy Trading, Free Stocks Investing |
$0 |
US Stocks, ETFs, Cryptocurrencies, Forex |
No |
No |
||
Robo Advisor, IRA account |
$0 |
Stocks, Options, Bonds, Cryptocurrencies, Forex |
Yes |
Yes |
||
Options Trading |
$500 |
Stocks, Options |
Yes |
No |
||
Cryptocurrencies |
$10 |
Cryptocurrencies |
No |
No |
eToro
eToro is among the leading social trading platforms in the world, offering stock and crypto trading. Besides investment options, eToro also has research tools, sentiment data, and fundamental analysis.
Interactive Brokers
Interactive Brokers is a multinational brokerage firm that brokers futures, options, stocks, futures options, funds, bonds, and forex. Investors only need to fund their account with $100 to get started.
eOptions
eOptions is a brokerage firm that offers the latest and best in digital options trading. With charges of $0 per trade, eOptions is best for advanced traders or international investors who require automated trading and prefer low margin rates.
The available tradable securities on the platform include options, ETFs, mutual funds, bonds, and stocks.
Coinbase
Coinbase is ideal for crypto trading since it's a secure platform for buying, transferring, storing, and selling cryptocurrency. The platform is completely remote-first and doesn't have a physical headquarter.
Although Coinbase has potentially high transaction fees, it's best for crypto traders since it supports a large number of currencies.
Summary
Summing up, you should know how to invest 5000 dollars by now. Exchange-traded funds (ETFs) and index funds are the go-to options to invest in for diversified portfolios. ETFs can be traded on major exchanges without commission fees.
Crypto trading is another notable option, although the volatility in the crypto market poses a risk. At the end of the day, you should weigh the risks and benefits before investing in any asset.
FAQs
How Can I Double 5000 Dollars?
You can double 5000 dollars by investing in index funds or ETFs that are tied to equity markets. Alternatively, you can invest in high-risk assets, like high-return funds.
How Can I Invest 5000 Dollars?
You can invest your 5000 dollars in an IRA or investment account with a major brokerage firm. After opening one, you can either invest in crypto, stocks, index funds, or ETFs.
What Is a Good Investment for $5000?
You can use a robo advisor to decide the best investment vehicle for your income and risk tolerance. Some investment options include IRA accounts, commission-free ETFs, and stocks.
Can I Retire Early If I Invest 5000 Dollars?
If you let your investments compound, you can make a good amount in investment returns. Invest your money in stocks and keep reinvesting the returns you make. In a few decades' time, this should equate to a huge sum of money.
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Team that worked on the article
Ivan is a financial expert and analyst specializing in Forex, crypto, and stock trading. He prefers conservative trading strategies with low and medium risks, as well as medium-term and long-term investments. He has been working with financial markets for 8 years. Ivan prepares text materials for novice traders. He specializes in reviews and assessment of brokers, analyzing their reliability, trading conditions, and features.
Olga Shendetskaya has been a part of the Traders Union team as an author, editor and proofreader since 2017. Since 2020, Shendetskaya has been the assistant chief editor of the website of Traders Union, an international association of traders. She has over 10 years of experience of working with economic and financial texts. In the period of 2017-2020, Olga has worked as a journalist and editor of laftNews news agency, economic and financial news sections. At the moment, Olga is a part of the team of top industry experts involved in creation of educational articles in finance and investment, overseeing their writing and publication on the Traders Union website.
Olga has extensive experience in writing and editing articles about the specifics of working in the Forex market, cryptocurrency market, stock exchanges and also in the segment of financial investment in general. This level of expertise allows Olga to create unique and comprehensive articles, describing complex investment mechanisms in a simple and accessible way for traders of any level.
Olga’s motto: Do well and you’ll be well!