The best ways to invest $5,000

Building up $5,000 to invest isn’t easy — no matter how you did it, the process likely involved a fair amount of penny pinching and going without. So here’s the good news: investing that money is fairly easy.

Richard Drew/AP
Trader John Doyle, center, works on the floor of the New York Stock Exchange (May 24, 2016). Investing $5,000 may sound complicated, but it is actually fairly easy.

Building up $5,000 to invest isn’t easy — no matter how you did it, the process likely involved a fair amount of penny pinching and going without.

So here’s the good news: Investing that money is fairly easy. It’s an amount that falls well above most online broker and robo-advisor account minimums, and it gets you past many mutual fund minimums. Both are snags that investors with lesser amounts often hit.

Here are five ways to invest $5,000.

Grab 401(k) matching dollars

If your employer offers a 401(k) or other retirement plan with matching dollars, you don’t want to miss out on those. If you haven’t grabbed them, that’s your first choice for this extra money.

But getting a lump sum into a 401(k) is a little tricky. You can’t make a deposit; these accounts are funded via your paycheck. What you can do is a little workaround: First, stash that $5,000 in a savings account. Most 401(k) plan providers allow you to change your contribution amount at any time, which means you can temporarily ramp up how much is pulled out of each paycheck. To account for that deduction, repay yourself from the savings account each pay period. Do this until you’ve drained the savings account, at which point you can adjust your contribution back down or stop it altogether.

The payoff: Let’s say your employer matches 50%, and you get that $5,000 into your 401(k) and then stop contributions. After 30 years at a 7% return, your balance would be more than $57,000.

Come close to maxing out your IRA for the year

With $5,000, you can nearly have your pick of the litter, in terms of account choice. But may we strongly suggest an IRA?

This is a retirement account that allows you to invest independent of your employer. If your company doesn’t offer a 401(k) or you’ve already contributed enough to your plan to grab those matching dollars, you’re probably a good candidate for an IRA.

There are two types of IRAs, Roth and traditional. The major difference is in their tax treatment: Contributions to a traditional IRA are tax deductible, but distributions in retirement are taxed. Roth IRA contributions net you no immediate tax benefit, but you can pull the money out — along with investment earnings — tax-free in retirement. Both have contribution limits, currently set at $5,500 per year. You’ll nearly hit the top of that in one clean deposit.

If you’ve already maxed out your IRA for the year, and this is extra money on top of that, you’ll want to open a brokerage account instead. It allows you to invest but doesn’t offer the tax perks of an IRA.

The payoff: At a 7% return, you’re looking at $40,000 in 30 years — plus those IRA tax benefits.

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Diversify with commission-free ETFs

You’re well over the standard mutual fund minimums, which typically hover between $1,000 and $2,500.

But one or two mutual funds does not a diversified portfolio make. That means it can still be relatively difficult to diversify, even with as much as $5,000. (The exception: target-date funds, which are inherently diversified so you can put your full investment in a single fund. These can have high expense ratios but are one option for investors who prefer to be hands off.)

Buying five $1,000-minimum index funds isn’t the answer. That would get you equal exposure to the asset classes tracked by those funds, which probably isn’t the asset allocation you want. In most cases, particularly if you’re young, you’d want much more exposure to stocks and minimal exposure to bonds.

Enter exchange-traded funds, which are a form of index fund that trades like a stock. That means you avoid the whole minimum song and dance altogether and instead pay a share price to buy into the funds. In most cases, that share price will be much lower than the typical fund minimum, meaning you can buy more funds, get more diversification and spread your money in a way that makes sense for your age and risk tolerance.

You can buy ETFs through your IRA or through an online brokerage account. In either case, you’ll want to pay attention to investment fees and focus on commission-free ETFs so you’re not paying a fee — which can run up to $10 — each time you buy and sell. A broker’s fund screener can help you narrow down its fund choices.

The payoff: While both have a place in most portfolios, stocks and bonds perform differently. Stocks offer higher returns at a greater risk, and bonds offer lower returns but balance out that risk. Over the past 20 years, stocks returned an average 8.19%; bonds returned 5.34%. If you have the appetite and time horizon for risk, it pays to take it.

Get help from a robo-advisor

If the last section went over your head, we have an alternative solution: robo-advisors, which do all the work of diversifying for you, managing your investments for an annual fee of around 0.25%.

With a $5,000 initial deposit, you can choose from several options: Betterment has no account minimum but charges $3 a month to accounts under $10,000 that don’t agree to auto-deposits of at least $100 a month. That means failing to keep up your savings momentum once you’ve opened the account could cost you — but on the other hand, an impending fee can motivate you to avoid it, which could push you to save more.

Wealthfront may be a better choice, because it manages the first $10,000 deposited for free. WiseBanyan is also free of management fees and has no account minimum, and you’ll just sneak by the $5,000 minimum of Charles Schwab’s robo-advising arm, Schwab Intelligent Portfolios.

At a robo-advisor, you can open an IRA or a taxable brokerage account.

The payoff: Peace of mind that someone — or rather, something — has an eye on your investments. Robo-advisors also boast higher returns, though because most of these companies are fairly new, we’ve yet to see whether that advantage holds up over the long term.

Boost your financial security

Sometimes you get the biggest return on your investment by paying off credit card debt or creating an emergency fund.

Many people don’t consider those an investment, but at the risk of sounding impolite, they’re wrong. Credit card interest rates can range from the single digits — if you’re lucky — to 20% or more. Paying off the balance is the equivalent of an investment return equal to your card’s interest rate. Not having an emergency fund often turns into carrying debt on one of those cards. Once that ball gets rolling, it’s extremely difficult to stop it.

If you’re carrying debt at an interest rate that’s higher than what you could earn through long-term investing — the 7% we’ve used in all of the above calculations is a good tipping point — that $5,000 will go the furthest if you use it to pay that off.

If you don’t have an emergency fund, put that cash in a liquid vehicle, like a savings account. An online bank typically pays the most interest, around 1% right now.

And if you’re torn between the two? Put $500 in the bank for a little peace of mind, then use the remaining cash to wipe out debt.

The payoff: Settling a $5,000, 18% interest rate credit card debt in one chunk, rather than making minimum payments over time, will save you more than $4,000.

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @arioshea. This article first appeared at NerdWallet.

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