How to Invest $5,000 - NerdWallet (2024)

A $5,000 windfall is unlikely to change your life, but it will likely change the way you invest – or give you a starting point to start investing if you don't already.

What is the best way to invest €5,000?

It's up to you, but we have ideas. One of these will undoubtedly suit your risk tolerance and goals, and they are all within reach.

1. Invest in your 401(k) and get the dollars that match

If you have a 401(k), your company offers to match your contributions and you don't accept the offer, this decision is simple: go for that match. Many companies will match half or all of your contributions, up to 3% to 6% of your salary. It is the highest guaranteed return on investment.

Typically, you can't put a lump sum of $5,000 into your 401(k), but having that money in the bank may give you room in your budget to grab those matching dollars. These 401(k) contributions will make your paycheck smaller, but you can pay yourself back with the $5,000 either after each paycheck or when there is a shortfall for the month.

»Are you on your way to retirement?Find out with our401(k) calculator.

2. Use a robo-advisor

You can build a portfolio of ETFs, or you can have one of these computerized advisors manage a pre-built portfolio for you. Robo-advisors offer completeportfolio management.

To take the easy route, you typically pay a management fee of 0.25% to 0.35% of your account balance per year on top of the ETF expense ratios. However, there are a few free options.The prosperity fronthas a minimum of $500 and manages up to $5,000 for free. Axos Invest has no minimum and is free indefinitely. Charles Schwab's advisor, Intelligent Portfolios, charges $5,000 and uses its own funds, but does not charge management fees.

3. Open or contribute to an IRA

The annual IRA contribution limit is$7,000 in 2024 ($8,000 if you are 50 or older), so you're just a hair away from achieving it. Being this close may motivate you to scrape together the rest, but even if it doesn't, an individual retirement account is the best home for that money if you don't have a 401(k) or if you've already gotten your matching retirement account . dollars.

Like a 401(k), an IRA is a retirement account, but you don't need an employer to have one. You canopen an IRAwith any online broker. Many have no account minimums; those who either need much less than $5,000 or forego their minimum for an IRA.

4. Buy commission-free ETFs

A $5,000 investment will get you past most standard minimums for mutual funds and index funds, which are typically between $1,000 and $3,000. But one or two mutual funds won't make onevaried portfolioto make. (The exception is target date funds, which are inherently diversified, allowing you to place your entire investment in a single fund. These can have high returns.cost ratiobut is an option for investors who prefer to be hands-off.)

If you invest in five index funds of at least $1,000, you are buying an equal share of the five types of investments tracked by those funds, which is probably not the portfolio you want.

Enter exchange-traded funds that you can purchase through that IRA or an online brokerage account. ETFs are index funds that trade like stocks. You avoid the whole song and dance of minimum prices and instead buy in at a share price that is, in most cases, much lower than the typical fund minimum. You can buy more funds, get more diversification, and spread your money in a way that suits your age and risk tolerance.

ETFs typically have low expense ratios, but it's best to focus on commission-free ETFs so you don't have to pay a fee every time you buy or sell. These costs can be as high as $10 and represent a small investment. Most brokers provide a list of commission-free ETFs.

5. Stock trading

Stock trading has a certain allure, and if you've been feeling it, it might be time to do something about it - with a very small percentage of your portfolio. A good rule of thumb is to limit stocks to 10% or less of your portfolio and allocate the rest of your money to low-cost funds aimed at retirement.

Those annoying commissions come back here too. Avoid or limit costs by using a low-cost broker or a free trading app.