If you’ve managed to save up $5,000, kudos are in order. Whether you built up that cash from grinding away at your job or reining in your spending, you’re well ahead of the average American, who doesn’t even have $1,000 set aside for an emergency.
You don’t want to blow it. You want to grow it. Stashing $5,000 in a bank account may feel like the safest option, but over time, its value will shrink with inflation. There are other ways to make that money work for you.
As a finance writer, I’ve picked up many of those strategies from financial experts and applied them as a DIY investor. I’ve had to. Managing money responsibly is a necessity, not an option, for freelancers like me. It means I can also relate to people who are new to investing.
Now I want to use my personal experience to help you along the way to your best financial future — and hey, $5,000 is a great start.
The best strategy for you will be highly dependent on your personal situation. Let’s look at a few hypothetical scenarios to help you start thinking about how best to balance growth and risk with a pile of cash this big.
Imagine someone beginning her career, like Rachel, 25, who’s single and who just started an entry-level marketing job. The idea of investing excites her — but it also stresses her out because $5,000 is all she has saved.
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Common wisdom is to keep at least three months’ worth of money stashed away in an emergency fund — and that’s good advice.
If I were in Rachel’s situation, I might consider putting $4,000 in a high-yield savings account so I have a solid start and access to fast funds, especially for an emergency.
I might put the other $1,000 into a broad-based ETF with a beginner-friendly brokerage with low fees — a safer alternative for beginner investors than daytrading or picking their own stocks.
Or I could start investing in my retirement really early, investing that $1,000 in a Roth IRA account, and take advantage of the tax-free benefits.
While this kind of allocation may not come with huge gains, it’s good to start a wealth-building journey on solid ground and have an emergency fund available for life’s uncertainties.
Picture an IT tech like Raj, 30, who’s married, no kids. His company pays him a good salary and he’s managed to pay down his debt and even put some cash aside in an emergency fund. He’s ready and keen to start investing.
If I were Raj, I’d consider investing $3,500 of my $5,000 in a total stock market ETF with a taxable brokerage account.
I might invest another $1,000 in a broad-based market ETF in a Roth IRA or Traditional IRA (depending on current income and future expectations) to save for retirement.
The remaining $500 would be “play money” to invest in a few solo stocks I feel good about. But as a beginner, I’d avoid investing in the latest trending stocks or day trading until I’m much more experienced.
In the meantime, I might buy more ETF shares and read up on news from reputable publications that follow the stock market. Then I could try a no-risk paper trading simulator to test day trading before diving deeper into these riskier strategies.
Putting all $5,000 in the market as a beginner would expose me to market volatility but it would also teach the value of staying the course. At 30, Raj has time to ride out the ups and downs of the market for the long term, and historical data shows the market has always recovered from dips in the past.
Danielle, 28, is a single mom and teacher who, when not working and raising her son, is also juggling $25,000 in federal student loans. For Danielle, every dollar has a job and she wants to be more cautious with her money.
In Danielle’s situation, paying off debt would be my top priority. Interest on $25,000 could mount up quickly. I might use my savings to tackle the student debt with a $2,500 lump-sum payment.
I’d put another $1,000 of my $5,000 in savings into a high-yield savings account so I’d have instant access to the cash in an emergency — something any single parent would understandably worry about.
It’s clear Danielle doesn’t have the time or financial cushion to take on a ton of risks. In her position, I’d consider investing the remaining $1,500 in a low-risk, income-focused option like a bond portfolio with a robo-advisor.
In Danelle’s position, I’d avoid investing in ETFs until I had a solid emergency fund, was debt-free and secure with a reliable income. While this strategy wouldn’t generate growth, it’s predictable with a safety net if life gets real.
Terry, 35, is married with one child. He’s a civil engineer and has a 401(k) through his firm. He wants to accelerate retirement and go beyond investing basics. He’s disciplined but not highly experienced when it comes to investing.
If I were Terry, I’d consider putting the entire $5,000 in a tax-advantaged IRA — either traditional or Roth — after crunching the numbers in an online IRA calculator to compare the tax rates for traditional and Roth IRA accounts.
Terry doesn’t have the time to micromanage investments or the experience to “beat the market.” This novice investor has a family to support.
In his shoes, I’d set up my IRA account with a brokerage known for low-fee mutual funds and ETFs.
I’d put most of my $5,000 in market ETFs and the remainder in blue-chip stocks or income-generating assets like REITs or bond ETFs. That kind of diversification is key to balancing growth and risk.
As for accelerating retirement, I could set up automatic monthly deposits into my Roth IRA, increasing my prospects for capital growth and income-generating investments. Like Raj, Terry has time to let his tax-sheltered investments sit for years.
There’s an investment strategy for everyone, whether you have $50, $5,000 or $500,000. And the strategies I’d consider might not work for somebody else.
That’s why it never hurts to consult a professional to talk through your own unique situation.
If you’ve saved up $5,000, you’ve already made great financial moves. A qualified financial advisor can help ensure you’re making all the right moves going forward, too.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
