How do I Invest $5,000?

$5,000. You could blow it on a Pac-Man machine for the game room, a jukebox to sit next to the wet bar, a really big flat-screen Plasma TV to watch Diners, Drive-Ins and Dives or a trip to the Bahamas. You could also prove to your parents, once and for all, that you are a responsible human. Invest the money. There's lots you can do with $5,000 to put yourself on the way to -- drum roll for the cheesy investment geek cliche, please -- securing your financial future.

Step 1

Start an emergency fund. It's not very exciting. Technically, it's not even investing, it's saving. But, you are investing in peace of mind by having six month's of expenses set aside in a safe, liquid product such as a savings account. Of course, $5,000 probably won't cover six month's worth of expenses, unless you're an unemployed minimalist nudist, but it's a beginning.

Step 2

Fund an IRA. As of November 2010, $5,000 just so happens to be the annual contribution limit for IRAs for people under 50 years of age. You can put the five grand in any combination of Roth and traditional IRAs. Remember, you can deduct traditional IRA contributions from your taxable income. You can't do this with a Roth, however, unlike a traditional IRA, all Roth withdrawals once you've hit age 59-1/2 and have held your account for at least five years come out tax-free.

Step 3

Think of your kid's future. Open a 529 college savings plan. $5,000 would be a fantastic start to ensure your little rocket scientist can afford to go to Harvard. While 529 contributions are not tax-deductible, if you use the cash from your account to pay for higher education costs, you won't have to pay federal tax on any earnings you access. Most states don't tax 529 funds that go towards college costs either.

Step 4

Open a brokerage account, mutual fund account or another type of account that allows you to make regular investments in stocks, bonds, mutual funds or other securities. Take advantage of dollar-cost averaging. As the U.S. Securities and Exchange Commission notes, by investing a little bit of your $5,000 every month, you buy more shares when prices are low and fewer shares when prices are high as opposed to taking the risk of tossing your entire 5K in when the market is at a peak.

Tip

  • Unless you qualify for an IRS exemption, such as funding higher education costs or the purchase of a first home, Uncle Sam generally penalizes IRA withdrawals that take place prior to age 59-1/2.

About the Author

As a writer since 2002, Rocco Pendola has published numerous academic and popular articles in addition to working as a freelance grant writer and researcher. His work has appeared on SFGate and Planetizen and in the journals "Environment & Behavior" and "Health and Place." Pendola has a Bachelor of Arts in urban studies from San Francisco State University.