Disposable income is something we all strive for. While some have extra cash each month based on salary or business revenue, others may find themselves with unspent money after a windfall or a hefty tax refund. Regardless of the source, disposable income shouldn’t sit idly in your checking account. You have many opportunities to invest some of that money so it can work for you. If you’ve found yourself with $5,000 to put to work, here are several options for investing.
Options for the Risk Averse
When hearing the word investment, many immediately think of gambling money away. Although risk exists in investing, some options involve less risk than others. Think of investing opportunities on a scale from one to 10. Those who are risk-averse should put their money into investments that fall in categories one or two. More aggressive investors who have an appetite for risk may look toward options on the higher end of the spectrum.
For the risk-averse, the following encompass the best ways to invest $5,000:
Money market accounts
Offered by banks or credit unions, money market accounts may work as a higher-interest option than a savings or checking account. Money market accounts, however, often require a higher minimum deposit, and transactions may be limited each month.
When offered through a bank or credit union, money market accounts are insured under FDIC or NCUA deposit insurance. If established through a mutual fund company, no guarantee on the funds exists.
Online savings accounts
Several online banks have emerged in the past few years. One of the most popular products from these banks includes an online savings account. These types of savings accounts carry little to no fees, have small or no minimum deposit requirements, and no term. They pay interest rates several times higher than conventional banks or credit unions, currently between 1 and 2 percent.
Certificates of deposit
Certificates of deposit, or CDs, operate as a long-term savings account. Banks and credit unions offering CDs give customers options for the term of the account. These often range from a few months up to several years. The longer the term, the higher the interest paid. CDs are insured like other deposit accounts from banks or credit unions. This means they are a low-risk option.
Invest in Moderate-risk Options
If your tolerance for risk is higher on the spectrum, the following moderate-risk investments may be a better fit:
A newcomer to the investment world is peer-to-peer lending. This investment strategy involves participating as an investor in loans to individuals. Platforms like LendingClub or Prosper allow investors to fund loan applications from qualified borrowers.
As the loans are repaid, the investor reaps part of the interest rate charged as a return on investment. Rates of return range wildly in the industry, from five to 30 percent. However, they carry no guarantee. If a borrower defaults on repayment, investors do not receive their funds back.
Mutual funds also offer a way to invest moderately. A balanced mutual fund invests in both equity positions (stocks) and debt positions (bonds) through a single investment. Professional fund managers build a portfolio of stocks and bonds into which individuals may invest.
Balanced mutual funds offer growth potential through stocks while steadying the investment with fixed-income securities like bonds. This puts them lower on the risk spectrum. However, there is no guarantee the fund will perform well over time or a set interest rate one can bank on.
More Aggressive Alternatives
For investors who have a high tolerance for risk, the following aggressive options may be worth considering for a $5,000 investment:
Stocks investments represent ownership shares in publicly-traded companies. Anyone can purchase individual stocks in a brokerage account. Investing in individual stock positions carries high risk because shareholders of stocks are last on the list to receive repayment should the company fail. Shares of stocks can also fluctuate significantly over time, dizzying investors when markets are moving and shaking.
Real estate investment trusts, or REITs, offer a way to invest in real estate without doing the heavy lifting. REITs provide access to a pool of real estate investments managed by professionals in a region or sector of the market. A REIT may generate steady dividends and growth on the initial investment amount. However, this carries no guarantee.
Growth index or mutual funds
Index funds may also provide a sound option for investors with higher risk appetites. These funds track the performance of an index like the S&P 500 over time. This means fluctuations are inevitable. However, investors do not need to pick and choose stocks on their own.
Similarly, growth-focused mutual funds provide diversification as index funds, albeit in an active way. A fund manager picks which stock investments to include in the fund. Positions may change at any time to potentially perform better than a passive index fund. Both carry the risk of loss of principal.
As you can see, investors have several options for generating a return on $5,000. Be sure to consider how much risk you are comfortable taking on with an investment before committing. Also, remember that most investments do not come with a guarantee. Carefully weigh the pros and cons of low-, moderate-, and high-risk investments to help make the right decision for you.