Extra cash is a luxury, but deciding how to put it to work can be a challenge. With inflation still high, making the right money moves is crucial. Whether you’re looking to grow your savings, diversify your investments, or pay down debt, having a plan for your $5,000 can help you make the most of your money.
Key Takeaways
- Investing in low-cost index funds like the S&P 500 or Nasdaq-100 can provide broad market exposure and long-term growth potential.
- International index funds offer diversification beyond U.S. markets, tapping into global investment opportunities.
- Sector and thematic ETFs allow targeted exposure to specific industries or investment themes.
- REITs provide income-generating real estate exposure within a brokerage account.
- Investing alongside legendary investors can leverage their expertise, but carries inherent risks.
- Personal finance factors like risk tolerance, goals, and time horizon should guide your investment choices.
7 Smart Money Moves to Make With $5,000 Right Now
Investing $5,000 requires careful consideration of your financial goals, risk tolerance, and time horizon. These factors will guide you in choosing the most suitable investment options. In this article, we’ll explore seven smart money moves you can make with $5,000 right now, each offering its own unique advantages and considerations.
Invest in S&P 500 Index Funds
The S&P 500 index is a benchmark comprising 500 large-cap U.S. stocks, representing approximately 80% of the U.S. equity market. Investing in a low-cost index fund like the Vanguard S&P 500 ETF (VOO) or the Vanguard 500 Index Fund Admiral Shares (VFIAX) can provide broad market exposure and the potential for long-term growth.
According to Robert Johnson, a finance professor at Creighton University, even Warren Buffett endorses this approach. In his 2014 letter to Berkshire Hathaway shareholders, Buffett stated that upon his passing, the instructions for the trustee managing his wife’s inheritance would be to invest 90% in a low-cost S&P 500 index fund.
The historical annual rate of return for the S&P 500 is just over 10%. While past performance doesn’t guarantee future results, investing in a broad market index fund like the S&P 500 remains a time-tested strategy for building long-term wealth.
Invest in Nasdaq-100 Index ETFs (QQQ or QQQM)
For investors with a higher risk tolerance seeking growth-oriented exposure, the Nasdaq-100 index offers an alternative to the S&P 500. The Invesco QQQ Trust (QQQ) and the Invesco Nasdaq 100 ETF (QQQM) track the Nasdaq-100 index, providing exposure to the 100 largest non-financial companies listed on the Nasdaq exchange.
“QQQ tracks the Nasdaq-100, which provides exposure to innovative, technologically focused companies for nearly 25 years,” says Paul Schroeder, QQQ equity product strategist at Invesco. “It is the second most traded ETF and fifth largest ETF in the world, accounting for 27% of all large-cap growth ETF assets.”
With an overweight allocation to tech giants like Microsoft, Apple, Nvidia, Alphabet, and Amazon, the Nasdaq-100 has delivered strong historical performance. Over the past decade, QQQ has returned an annualized 18.4%, outpacing the S&P 500. QQQM offers the same strategy as QQQ but with a lower expense ratio of 0.15%, appealing to buy-and-hold investors.
Invest in International Index Funds
Investing $5,000 in international index funds can provide valuable diversification beyond U.S. markets. Funds like the iShares Core MSCI EAFE ETF (IEFA) offer exposure to developed markets, while the iShares Core MSCI Emerging Markets ETF (IEMG) focuses on emerging economies.
During periods when U.S. markets underperform, such as the “lost decade” from 1999 to 2009, international markets can provide a counterbalance. Blended funds like the Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) offer a mix of developed and emerging market exposure.
Global diversification can hedge against U.S. economic stagnation or dollar weakness, potentially enhancing overall portfolio returns and risk management.
Sector or Thematic ETFs
With $5,000, you can invest in sector or thematic ETFs, offering more targeted exposure than broad market funds. The market is divided into 11 Global Industry Classification Standard (GICS) sectors, each reacting differently to economic cycles.
Sector ETFs, like the “Select Sector” suite from State Street or Vanguard’s sector ETFs, allow you to gain exposure to specific industries based on your expectations and market outlook.
Alternatively, thematic ETFs invest in companies aligned with particular trends or themes, such as artificial intelligence, cybersecurity, or clean energy. These ETFs can provide exposure to potential growth opportunities but often carry higher costs and more concentrated portfolios compared to sector ETFs.
Invest in Real Estate Investment Trusts (REITs)
Investing $5,000 in REITs offers a convenient way to gain diversified real estate exposure within a brokerage account. REITs are publicly traded companies that own, operate and finance income-generating real estate properties.
A key regulation requires REITs to distribute at least 90% of their taxable income to shareholders as dividends, making them an attractive option for income-focused investors.
REITs also allow you to target specific real estate sectors, such as telecommunications (American Tower Corp.), commercial office (Boston Properties Inc.), or self-storage (Public Storage).
Invest With Legendary Investors
For those seeking to align their investment approach with renowned market figures, there are opportunities to invest alongside legendary investors like Warren Buffett, Carl Icahn, and Bill Ackman.
Investing in Berkshire Hathaway, Icahn Enterprises L.P., or Pershing Square Holdings can provide access to the expertise and track records of these investment titans, potentially offering outperformance opportunities.
However, this approach carries inherent risks, including volatility, management succession uncertainties, and unique tax implications for investments structured as limited partnerships.
Pay Off High-Interest Debt
While not an investment per se, using $5,000 to pay off high-interest debt, like credit card balances, can be a smart financial move. According to the article, the average American household has around $7,950 in credit card debt, often with interest rates exceeding 20%.
Paying off a $5,000 credit card balance with an APR of 24.6% could save you potentially $1,500 in interest payments throughout repayment.
Eliminating high-interest debt frees up cash flow and reduces the overall interest expenses, effectively providing a risk-free return on your money.
Conclusion
Having $5,000 to invest or allocate presents a valuable opportunity, but it’s crucial to align your choices with your personal financial goals, risk tolerance, and time horizon. Whether you opt for broad market exposure through index funds, targeted sector or thematic investments, real estate through REITs, or aligning with legendary investors, the key is to make an informed decision that suits your unique circumstances.
Remember, the most important step is taking action and putting your money to work. By carefully considering the options outlined in this article and conducting further research, you can make smart money moves that position your $5,000 for potential growth and financial success.
