So you got a big bonus or sold something and now you have $10,000 to invest somewhere. Or maybe you are just looking to get started in investing and have saved up $3000, $5000, or $10,000 to invest. What is the best thing to do? Buy stocks? Put the money in a mutual fund? Put it in US savings bonds or a bank CD? Or maybe put the money down towards a rental property? Here are some ideas for how to invest that wealth so that it will grow and improve your life for years to come:
1. Pay off credit cards. Yes, I know that this is supposed to be about investing and not getting out-of-debt, but the truth is that if you invest well in the stock market you’ll get returns of 10-15% over long periods of time. Your credit cards will charge you 12%-24% like clockwork no matter what. It is very difficult to overcome these types of fees and interest rates through investing. It therefore makes sense to pay off any loans you have with interest rates over about 6% before you start investing elsewhere.
2. Start an emergency fund. Again, it is true that money sitting in the bank will not provide the same sort of returns that you would get from other investments, but if you don’t have any ready cash it will force you to sell investments, right at the wrong time, or take out a high interest loan when your car needs major repairs, you end up in the emergency room, or the roof needs to be replaced. It therefore makes good financial sense to have $9,000-$15,000 in bank assets that you can draw on quickly in an emergency or in the event of a job loss. Because inflation will be attacking these all of the time, do what you can to reduce the rot by keeping just enough for a likely disaster like a car repair in fully liquid assets like a money market fund and put the rest in bank CDs and other assets that you can withdraw from if needed but which pay a better interest rate. If you put some money that you would only need to touch in the event of a major emergency like a job loss in 5-year CD, you might lose a little interest if you needed to pull it out before it matured but you would more than make up for that rare loss with the additional interest you would gain during all those times when the CD was left alone and able to grow.
3. Buy a set of boring index funds. Index funds, where a set of stocks is purchased to match the performance of an index representative of a portion of the economy rather than money being actively managed by a team of professionals, have been shown to outperform active management due to their low costs and the inability of managers to outperform the markets over long periods of time. Good funds to choose are general broad-based funds like a total market fund, a large cap fund, or a small cap fund. With $10,000 you could split the money between large and small caps by purchasing two funds. Then, continue to add money to whichever fund has a lower value when you have cash available. This money will grow largely tax-deferred since these types of funds cast off little interest or dividends, allowing your money to compound and grow over time.
4. Buy a set of boring ETFs. Exchange Traded Funds, or ETFs, are like mutual funds that trade on the market like a stock. The maintenance costs on these tend to be even lower than they are for index mutual funds. Today there are many ETFs that mimic existing index mutual funds, often issued by the same fund company. You will pay a commission to a broker when you buy or sell these assets, but if you buy once and don’t touch them for 30 years the amount you save in yearly fees will more than make up for the larger up-front costs.
5. Invest in individual stocks. $10,000 is enough to invest in 1-3 individual stocks. You could buy 100 shares or more each of 3 stocks trading in the price range of $30 or less, which is really the least amount of shares you would want to buy to make a good return. You could find the best stock in three different industries, purchase them through a brokerage account, and then forget you own them for several years while the companies grow. You could also concentrate more, putting the whole $10,000 into your best single stock. This would provide a much better return if the stock you picked does well but would return nothing if the stock you buy just sits there for years. You could also see a scandal at the company or simple non-performance by the company result in a large loss, possibly your whole position. Still, if you see this as an initial investment and you plan to save and invest regularly, the risk of such a loss is offset by the possible gain if you can pick companies that will grow over long periods of time.
The most important thing is to understand that an initial $10,000 is just a start. You need to be saving and investing from each paycheck to grow your wealth to the point where you attain financial independence. And that is a great place to be. It is worth putting some money aside and waiting rather than spending money before you earn it to get there.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.