You have $10,000, and your bills are paid. Do you (a) fly to Tahiti to sip mai tais on the beach, (b) stick it in the bank and save it for a rainy day or (c) make some strategic low-risk investments?
While the first option is tempting and the second option is safe, itâ€™s the third option thatâ€™s most likely to help you build a solid financial future. The answer to the next question, however, isnâ€™t so obvious. How should you invest that money?
Thereâ€™s no one strategy thatâ€™s right for everyone, but there are some solid low-risk options that can help you turn that $10,000 into a great deal more over the years. Here are six ways to consider investing $10,000.
Even if it seems like an eternity away, starting to save for retirement today is one of the smartest moves you can make for your long-term financial health. If your employer offers a retirement plan like a 401(k), that can be an easy and effective way to save.
401(k) plans allow you to regularly contribute a portion of your salary to an investment account where your funds can grow tax-deferred (a traditional 401(k) plan) or tax-free (a Roth 401(k) plan) until you reach retirement. Because the funds usually are automatically deducted from your paycheck, itâ€™s a good way to put investing on autopilot.
Some employers even offer matching contributions up to a certain amount. If your company does, you should contribute at least up to that amount so youâ€™re able to take advantage of every cent of free money. There are penalties for early withdrawals (before age 59 and a half and before the account is five years old), but for long-term savings, these plans are great options.
If your employer doesnâ€™t offer a 401(k) plan or youâ€™ve maxed out your annual contributions, you may want to consider an individual retirement account (IRA). IRAs offer many of the same benefits as 401(k)s, but you can open on an IRA on your own through a bank or brokerage firm. While IRAs offer more flexibility in some cases if you need the funds before retirement, there are income stipulations for Roth IRAs.
When it comes to investment payoffs, itâ€™s hard to beat the stock market, and you donâ€™t need a huge amount of money to dive in. While you can lose big time if you sink all your money into one â€śsure thingâ€ť gone wrong, diversified long-term investments in the stock market historically have paid off. Add the beauty of compound interest, and you could grow that $10,000 into a significant sum over a long enough time span.
While you can pick and choose individual stocks to invest in if you have the time and desire to do a lot of research, index funds offer an easy way to diversify your portfolio. In the simplest terms, index funds are mutual funds that pool your money and the money of other investors to buy a variety of assets. They arenâ€™t actively managed like other mutual funds; instead, theyâ€™re invested for the long term based on a market index like the Nasdaq 100 or the Dow Jones Industrial Average.
Because an index fund is more of a set-it-and-forget-it investment, you may be less tempted to buy and sell based on the short-term whims of the market. And the fees associated with index funds typically are low.
Exchange-traded funds (ETFs) are similar to index funds in that your money is pooled with other investorsâ€™ money and used to purchase a mix of assets. ETFs also can diversify your investments, theyâ€™re often a good tool for long-term savings. However, there are some significant differences between the two.
For starters, you typically need less money to invest in an ETF, as you can buy as little as one share. You also can purchase ETF shares at any point during the day, and where the market is at that particular moment will be reflected in the price at which you buy or sell. The price of an index fund, on the other hand, is calculated only at the beginning and end of the selling day.
While $10,000 may not be enough to scoop up a prime property of your own, it could be enough to invest in a real estate investment trust (REIT). These funds pool your money with the money of others and invest it in real estate properties.
You can choose from a variety of specialized REITs, including residential, commercial, and lodging and resort properties, and your profit (or loss) is determined by how well they do on the market. Itâ€™s a simpler way to invest in real estate without having to be a landlord.
Other lower-cost options for investing in real estate you may want to explore include using online real estate crowdfunding platforms and participating in real estate investment groups.
Depending on your career, an advanced degree or additional certification could boost your earning potential. Or perhaps itâ€™s time for a new and better-paying career path. As you prepare to follow your passion, research your current or desired industry to evaluate just how much your new education could pay off in actual dollars down the line.
How much is in your emergency fund right now? If itâ€™s not enough to cover three to six monthsâ€™ worth of living expenses, consider stashing some more cash in your savings. While the payoff wonâ€™t be huge (the interest rates on the best online savings accounts usually clock in between 2% and 2.5%), an emergency fund can prevent you from digging yourself into a hole in the event of an unexpected financial setback like a job loss or major car repairs.
In fact, most financial experts advise you to make sure you have an adequate emergency fund before you focus on other investments.
Figuring out what to do with $10,000 is a great problem to have, and there are plenty of options to consider. Before you choose one (or more), evaluate your financial goals, consider your unique situation and seek professional guidance as necessary. With some strategic moves and a little luck, it could become a recurring problem.