How best to invest $5,000…for a first home, kids’ college or retirement

Posted by Melanie Simons.
So you have $5,000 to invest. Maybe you got a bonus at work, or you came into a small inheritance. Or maybe it’s been accumulating in your checking account for a while, and you’ve been wondering what to do with it.
Once you’ve made sure a six-month emergency fund is set aside, don’t let inertia set in and the remaining amount sit idle, earning nothing. You want that money working for you. But before making a high-stakes gamble on the stock market, consider what your main financial goal is right now. That will guide how your excess cash should be invested:
  • Down payment on your first home: Or it could be another medium-term savings goal, such as a wedding; if you’re looking to get your hands on the money within the next five years (preferably with some growth on top) you shouldn’t be investing in a risky stock, or even a stock mutual fund spread among many companies—unless you feel comfortable with the risk of winding up with less than $5,000 after five years. Instead, you’ll probably want to invest somewhere relatively secure. A fixed-rate Certificate of Deposit would offer modest interest without any market risk. Use an online aggregator to get the best rate, but make sure the bank is trustworthy, and FDIC insured. Alternatively, consider asking your financial advisor to recommend a short-term bond mutual fund that doesn’t have any liquidity restrictions.

    Maybe you prefer to invest $4,000 securely, but want to be more adventurous with the remaining $1,000. You’d love the chance of a 20% return on investment, but could live with minus 20%. A stock or a mutual fund can offer this kind of potential gain (or loss!). Remember, not all funds are created equal. There are funds for all preferences, including socially responsible funds, so you don’t have to go against your principles to pursue gains. More than one in five investment dollars are placed into socially responsible investment strategies, and the number is increasing. Whatever your investment style, you will need a strategy for when to buy and sell, while remaining unemotional about your money during the scary times. Because that’s easier said than done, consider seeking out professional advice as you venture into the investment market.
  • Your kids’ education: Saving for school is a great way to prepare for the costs of college while reaping valuable tax benefits—if done right. Make use of the tax-advantaged 529 college savings plan, where you can choose from a wide selection of investments, much like a workplace retirement plan. One of the ways people make sure they’ve got a balanced retirement portfolio is by sticking with a target-date fund, which is a nice “set-it-and-forget-it” option for their nest egg. What most people don’t realize is they can use the same target-date concept for non-retirement goals. With a 529 college savings plan, you could set your kid’s first year of school as the fund’s target date: The investments get more conservative as that date gets closer, in order to preserve as much of the money as possible. Eventually, you can use it to pay for qualified college expenses without having to pay taxes on the savings or the growth!
  • Your retirement: If you’re planning primarily for retirement, the first thing on your mind should be reducing your debt, starting with the high-interest kind, of course. If you have $3,000 in high-interest credit card debt, then your $5,000 should be used to pay off your balance and then you can invest the rest. Think about using that money to contribute to an IRA or, if you’re at least age 50, taking advantage of catch-up contributions in your employer plan. Just be sure that the underlying investments are well-diversified, with a risk level comfortable to you.
Regardless how you end up investing your $5,000, it’s important to follow a disciplined process and stick to a plan. With a trusted financial advisor as your partner, you won’t need to go it alone.
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October 18, 2018