Okay, so you’ve got $5000 burning a hole in your pocket that you are ready to invest. That’s great, but the big question now is this; where exactly are you going to put that money?
Maybe an even bigger question is this one; is investing that money your smartest choice?
Greg McBride, the chief financial analyst at Bankrate, has this bit of wisdom for you: “If you’re asking what’s the best way to invest $5,000, it’s kind of like asking what should I have for dinner tonight? Well, it depends.” McBride says. “What do you like? What don’t you like? Do you have any allergies? What are you in the mood for? The same thing (applies) here.”
McBride advises however that, before you start getting into any specifics, you need to start with the basics.
Manisha Thakor agrees. The founder and CEO of wealth management company MoneyZen, Thakor says that “The first question you need to ask yourself is, ‘When do I need to spend that money?'” He adds that “My rule of thumb is investing is something you do for the long run, which I would define as a minimum of five years and ideally 10-plus years. Once you are sure it’s long-term money, now you’re ready to really get into the nuts and bolts.”
Before you begin, take a look at your basic financial situation
While having $5000 to invest is certainly not a bad thing, before you even begin to look for an investment vehicle to use you should do a thorough check of your basic financial situation.
McBride has some advice about where your money would be better spent than on any bonds, ETFs or stocks. Those include;
- Paying down any high interest debt that you might have, especially credit cards
- Stuffing the maximum amount of cash into your 401(k) or IRA
- Funding an emergency fund with enough money to cover at least six months’ worth of living expenses, if not 12 months
McBride says that “For the vast majority of Americans, tackling those three priorities is going to more than chew up that $5,000,” adding that “paying off a 15% credit card balance is like earning 15% risk free.”
In other words, paying down your high interest debt affords you a higher, risk-free rate of return than anything you might find by investing in financial security.
So, while you may believe that taking that $5000 you have in your sweaty little palm and investing it is an excellent idea, you should only do so if you’ve already taken care of your financial basics first.