First things first, congratulations! If you’re reading this article then there is a good chance you’re not grouped into the 57% of Americans who have less than $1,000 saved.
Even if you don’t have $5,000 saved today, by simply learning and researching where money should be invested, you are setting yourself up for financial stability. At the end of this article I share several tips to saving your first $5k if you’re not yet at that point.
Disclaimer: I’m not a financial advisor or a professional when it comes to investing. This article is purely to help you learn, and should not be considered professional investing advice. Investments can be risky.
My “Real Life” Results Of Investing $5,000
Before getting into statistics, trends, or hypotheticals, I wanted to share how a one time, $5,000, investment has grown with zero involvement.
At the time I was born, in the mid 1990’s, my parents did a selfless act and invested $5,000 of their hard earned money into two mutual funds on my behalf. The account was then presented to me as a graduation gift.
To date, no one had added to or drawn from the account, so the figures I share are truly from a one time, $5,000 investment. It’s my goal to never touch this account and continue to let it grow, so that I can pass it along to my future children and give them real life lesson on compounding growth.
Here are the growth details:
- Account opened in early 1995
- Age of investment, 25 years
- One investment of $5,000
- $2,500 was put into the mutual fund called “Fidelity Blue Chip Growth”
- $2,500 was put into the mutual fund called “Fidelity Growth & Income”
- Blue Chip Growth account value as of mid 2020, $47,563
- Growth & Income account value as of mid 2020, $11,629
As you can see, in 25 years, a $5,000 investment has compounded into $59,192!
I want to reiterate that no money was added to this over the years. Had additional money been added, then the growth would have been even larger of course. This is why it’s important to be consistently adding money to investment accounts, which I personally do through a Roth IRA and other mutual funds.
Let’s get into the best way to invest $5,000!
What You Should Do With $5,000 & The Best Ways To Invest It
Below I have listed three different investment recommendations that you should do if you have $5,000 and are ready to grow it. I have done my best to explain when certain mutual funds or accounts should be used based on particular financial needs.
As a side note, I work with a CFP (certified financial planner) that helps with my investments along with assisting with a short and long term financial plan. My CFP has offered a free 15 minute phone call for anyone who is interested in investing. Just complete the form below to be connected.
1. Open and Contribute to an IRA or Roth IRA
You probably have heard of the term “IRA” thrown around in the investing world, which just stands for individual retirement account. An IRA is a tax advantaged investing tool that allows people to have funds specifically reserved for retirement. If you have a 401k through your job or are nearing retirement, then an IRA may not be the correct choice for you.
The difference between a traditional IRA and a Roth IRA, is that a Roth IRA uses after-tax dollars which makes the money tax free at the time of withdrawal, starting at age 59.5. With a traditional IRA, the money at withdrawal is taxed, while all the other similarities and rules remain the same.
In 2020, the maximum you could contribute to an IRA or Roth IRA was $6,000, however there is no minimum contribution.
I would suggest anyone in their 20’s or 30’s to do everything they can to max out their IRA contributions each year, which would be a great option to invest $5,000 in. It’s advantageous to start early in life, so the effects of compounding can be fully realized.
For example, if you started a Roth IRA at age 25 and contributed the max, $6,000, per year until retirement, the account would be worth $1,190,000. Starting at age 35 would cut your returns down to an account value of $617,000.
Lastly, the money held within an IRA of either kind is dedicated for retirement, however there are several exemptions such as for first time home buyers and college eduction. If you think you could need the money you are investing today for an expense in the near future, then investing in an IRA may not be the right option for you.
Check out this MarketWatch article where I’m featured talking about IRA’s on TikTok.
2. Invest In Mutual Funds
I’m personally not big into owning individual stocks. I’d rather invest into a mutual fund where a professional fund manager is actively managing the stocks that make up the fund. This way my investment is protected through diversification.
There is absolutely nothing wrong with investing in individual stocks, it’s just personal preference.
As shown in my example earlier pertaining to the $5,000 investment, investing into mutual funds can prove to be an easy and smart way to consistent account growth. I would research 1-3 mutual funds that work for you, and split up your money each month or year into these. This way, if one of the funds is down, the hope is that the other fund(s) makes up for the loss.
I use Fidelity for some of my investing, their website is easy to use and the app is intuitive. Consider opening your mutual fund or IRA accounts through Fidelity.
As with stocks, mutual funds can be bought and sold at any time, quickly turning the investment into cash if needed. Not so with an IRA.
If you like the idea of knowing your money can be easily available, then mutual funds may be a great option. Just be prepared, there will be capital gains tax assed on the growth when sold. There is no yearly maximum to mutual fund purchases, so as you save more money you can increase your purchasing amount.
In the end, the stock market has grown at a predicable and consistent pace. It may be smart to break up the $5,000 and invest $1,250 per quarter each year. Consult a CFP for advice (see above).
3. Purchase A Cash Flow Positive Website
Buying, selling, and owning online businesses, such as websites, has become increasingly popular over the last ten years or so.
I’ve been involved with website investing since early 2018 and have experienced some large returns. While I’ve always purchased websites valued over $5,000, there is huge opportunity for growth around this price point.
So far, I’ve purchased two websites, the first site I flipped for a 60% ROI in just 4 months. The purchase price was $49,000. The second website I still own and it has doubled its value every 18 months. The starting value was $25,000.
Here is a video on how I flipped the website mentioned above:
Buying a website is much like buying a rental property, both provide cash flow along with appreciation and tax deductible expenses. Empire Flippers, the largest broker of online business, recently published a detailed report about all their transactions. You can download the full report here, however the key take away is that they saw websites’ appreciate a 10% per year, with average selling prices increasing 27% per year.
There is serious demand and growth taking place in the website industry!
Personally, I have several website investments and I think it’s a wise vessel for an investment of any size.
If you’re interested in speaking with Empire Flippers, who brokers online business valued at $30,000 and up, click here.
For those interested in a website purchase around the $5,000 price point, click here to be taken to the website brokerage I own, called Money Nomad Marketplace.
How You Can Save $5,000
Saving your first five grand is a huge accomplishment. In order to help you do so, I have outlined several ways that allowed me to build up savings and investments.
1. Make A Budget and be Conscientious On Spending
Set a monthly limit when it comes to eating out, shopping, traveling, etc as these expenditures can quickly erode your savings. Simply cutting down on spending (also known as consumption) will automatically fill your savings.
2. Avoid Debt
Most financial savvy people agree the only “good debt” to have is a mortgage, which should be paid off as soon as possible. Think twice before financing/leasing that new car, or prior to signing up for the Apple Card to finance your new computer.
By minimizing your monthly payments, you will be given the freedom to set money aside each month to build up to the goal of $5,000.
3. Add Another Source of Income or Get A New Job
While working two jobs, is no fun, it’s a viable way to fast track your financial freedom by increasing how much you can save. Its simple math…more income with low expenses equals additional money left over to invest.
Work hard and save now, then you can retire at 50 with a sizable nest egg of cash and investments.
I hope this article helped you better understand what to do with 5000 dollars. With wise choices and patience, you will be well on your way to turning that initial $5,000 into a much greater sum. Continue to increase the amount you allocate to investments each year so the full power of compounding can be experienced. Once you have surpassed the $5,000 mark, it will be time to explore the best ways to invest $100k. If you need to make quick money, check out our article on how to make $500 fast.
Email zach@moneynomad.com with any questions.
