Invest Your First $5,000

Photo by Sharon McCutcheon on Unsplash

You’ve saved up a pretty good amount of money and the question you are asking yourself is “What should I do first”? Regardless of the amount, whether it is $5,000, $2,000 or $10,000, it will always be a smart idea to invest this money instead of spending on various things and desires. I hope this article will give you enough data points on what to do next with your saved up money.

There are a lot of options of what you should do with your money depending on what your goals are and everybody has got a different idea of what to do with that five thousand bucks. This post will give you what I personally consider one of the smartest things to do with your money and I will try to provide the best advice from my perspective to ensure that this $5,000 will help you to start your wealth building life of a rich future. Of course I am not a financial adviser, so please make sure you consult with a professional if you are not sure what to do.

Roth IRA

The first thing I want you to do is think about the vehicle but you are going to put the $5,000 in. Since we are working with just five thousand here we want to minimize the future tax burden and get the best financial outcome for us, this is why we should consider a Roth IRA. A Roth IRA is an individual retirement account where you pay the taxes before you put the money in the Roth and then everything you make on it you never pay taxes while the money is growing in the Roth IRA. Even better, you do not have to worry about what tax bracket you are in when you retire because you are not going to pay taxes on it when you retire. All that money is yours!

Emergency Fund

The second thing is you have to make sure you have a rainy day fund and an emergency fund that you have got set aside for unexpected financial difficulties. This is where again a Roth IRA account makes a pretty good option to consider. The thing is your emergency fund should be someplace you can get it back out and this is why a Roth is a great option because in a Roth if you have an emergency you can pull the money right out that you put in it without any penalty or taxes. That is your money to take out.

In many cases your emergency fund should be large enough that you can live off for maybe three to six months and you should do what you feel is comfortable for you. It also means that if you only got $5,000 then put it in your emergency fund and keep adding to it until you feel comfortable with the amount of money you put aside for it.

Index Fund

Let’s now talk about how to help your money grow. Buying an Index fund is one of the best options to grow your money without needing to actively manage it and this is your third option. The great option is to start with the S&P 500 or the Russel 2000. The important thing to watch out for is fees for these funds, since they are actively managed there will be fees associated with them. So consider low-fee platforms like Vanguard or Charles Schwab to avoid paying a ton in management fees. If you take a look at Vanguard’s VFIAX Index fund that tracks S&P 500 you can see that the management fee is only 0.04% which means you will pay only $2 a year if you invest $5,000. If you go with funds then you will most likely get the market rate of return which is a great place to start.

Individual Stocks

The final and fourth advice of what you should do with $5,000 is consider investing in individual stocks. This could be the best option if you want to make returns that you deserve, returns that you can make with a relatively low amount of effort and relatively low amount of risk. Investing in individual stocks will require you to learn about how to analyze companies, stay informed about the market and check on your investments constantly. The upside is even with a small amount of money and you can look forward to an astonishingly large retirement fund or you can get retired a lot sooner.

The great idea is to start by looking at people like Warren Buffett and just simply follow what they have been doing for the last thirty years. With a little bit of work you can successfully get 15% or higher returns on your investment. This is also a great option for people who like to control where their money goes, when to buy and sell, what to reinvest into and so on.

This is the most fun way to invest five thousand dollars. You get to research companies that you really love, companies you are passionate about, and companies with a great competitive advantage whose management you trust and whose values you love.

Happy investing!