The Smartest Ways to Invest Your First $5,000, According a Former Financial Advisor

A man of the Millennial Generation is looking at his financial statement while eating lunch at a local sushi restaurant.
RichVintage / Getty Images

You’ve paid off your credit cards, you’ve put aside enough money for housing, you’re maxing out your 401k, you’ve built up about 9-12 months living expenses in cash and you have a little left over you’d like to invest — now what?

During my years as a financial advisor, I oversaw hundreds of clients through their first investments. There are countless ways to go about it, but the below strategies are the ones I found brought my clients the most returns — and kept them the most satisfied in the long run. 

See: It Costs Nearly 90% More for Couples to Retire Today Than It Did in 2002
Find: Suze Orman, Warren Buffett and Other Money Experts Weigh In on How To Best Set Yourself Up for Retirement

First things first, be honest about your debt obligations. Gains in the market aren’t really worth anything if you are paying 15% interest or more in credit card debt. Additionally, be honest about your investment expectations. It’s impossible to scroll past daily content about hedge fund managers getting their clients 15%, 20% or even 30% returns with sophisticated investment strategies — this is not that.

Building Wealth

The average investor should set expectations to comfortably outpace inflation. Typically, returns of 4-8% are modest notwithstanding the unprecedented easy monetary policy we have enjoyed for the past decade or so. Historically, the stock market has averaged around 6-8%, so if you check on any of your investments and have hit that target, it is a very good day. Anything above that is a great day. However, if you are being advised or reading about investment strategies to net you 13% or more, then it is the wrong day!

Not that it doesn’t happen — early investing in the right assets like Amazon or Apple could have netted you big bucks today. It’s also nearly impossible to walk outside now without hearing about the latest crypto millionaire.

See: Turn Your $50K Salary Into a $1M Retirement Fund
Find: Nearly Half of Seniors Expect to Work After Retirement — But There Might Be a Better Option

For those who have their first $5,000 of comfortable money to invest into the market, here are some suggestions.

Building Wealth

If you want to invest solely in the market and remain liquid

Equities are really the only way to go. For that you have the option to buy individual stock or buy into liquid mutual funds and ETFs.

Traditional equities means you can create your own account on an e-trading app and buy equities right away. Your gains will always be subject to short term or long term capital gains tax, but there will not be management fees.

Exchange-traded funds allow for you to invest money into a basket of securities that you otherwise might not have money for. For example, expensive stocks like Amazon, Netflix, and Apple and Alphabet Inc might be financially prohibitive or see you owning 1 or 2 shares per stock. Investing in an ETF allows you to invest in these companies without buying full shares, but still allows you to remain liquid, meaning you can withdraw your money at any time.

Something important to consider with ETFs and index funds in general is that they are more expensive than buying equities on your own. They are managed by a team of people and have management fees associated with them.

See: How To Find the Best Financial Advisor for You
Find: 14 Key Signs You Will Run Out of Money in Retirement

$5,000 is a great number to invest and see real returns. If you average 8% that’s $400 and then compounded interest on $5,400 the next year. In a 5-10 year period, that’s serious potential to double your money, all while passively investing in index traded funds.

Building Wealth

Mutual funds are similar to ETFs, but trade after the market is closed and are often associated with higher fees.

The main decision to make is whether or not you want to actively or passively invest. Actively investing means you are purchasing and selling the equities yourself. Passive investing means buying into mutual funds or ETFs and index funds and paying a bit of a premium.

Many chose to purchase equities on their own through trading apps, as it is a great way to learn the ropes and see what you’re comfortable investing in. A typical recommendation here is start with half of what you’re willing to invest, so in this case $2,500 and see how you perform. Then you can slowly start adding funds once you see what stocks you feel most committed to.

Important note: Investing in equities is not a smart way to save money for a home. While it allows you the liquidity you need for a home purchase, it is simply too unpredictable for important savings.

If you do not plan on needing the cash in the next couple of years

If you do not exceed the income limit of $139,000, a Roth IRA is one of the best places to park $5,000 as the annual contribution limit is $6,000. A Roth is most advantageous for this kind of investing as its gains and distributions are all tax-free. That means the gains you make in the market while the money is invested are not subject to the same capital gains taxes that investing in pure equities are.

See: Are You Doomed to Work Forever? What You Can Do if Your Social Security Isn’t Enough
Find: 27 Most Lucrative Side Hustles for People Over 50

The catch is that those gains cannot be touched until you’re 59 and a half years old. The money you have put in, though, is always available to you, so it in a way provides a type of liquidity that is not available in other retirement accounts.

If you want to both invest long-term and have an added death benefit for beneficiaries, front-loading variable life insurance policies are a good option. You can front-load the policy with a lump sum upfront to be invested and count towards the cost of insurance and fees. Suitability depends on your goals, but for the right investor they can kill two birds with one stone. If later on in the policy you cannot afford as high of a premium, you can always reduce the amount of money you pay per month in premiums once you are vested — which $5,000 is likely to have already covered.

$5,000 is a great way to start off investing, and a solid amount of money to begin accumulating accrued interest. Whether you want to stay liquid or keep it in the market for a long time, the most important thing is to be aware of fees and any taxes you will have to pay on gains.

More From GOBankingRates

Share this article:

Building Wealth

About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 
Learn More