Even when you have smart digital tools and a budget that aligns with your financial goals, saving money and building wealth still requires some effort. But how great would it be to have a fairy godmother or a genie in a bottle granting wishes, especially if one of those wishes gave you $5,000 to invest any way you wanted? Well, we asked these three financial experts how they would invest a windfall like that. Here’s what they told us.
My approach: Set your kids up for success.
I can’t think of a better way to invest $5,000 than saving for my children’s education. You might be asking, why would I do this when I could invest in so many other things? One really powerful reason: Your child is more likely to go to college, even if you’ve only saved a small amount.
A study by the Center for Social Development at the George Warren Brown School of Social Work at Washington University in St. Louis has confirmed it. Kids who have college savings accounts are seven times more likely to attend college than children who don’t have an account. The study also found that a college savings account was a better predictor of whether a child would attend college than race or parents’ net worth. Unbelievable, right?
When saving for college, I’d consider using a 529 plan to invest the money. Here’s why:
You won’t pay federal taxes. As long as you use the money for qualified higher education expenses, vocational school and/or fees or expenses (including tuition and fees, room and board, books and computers or computer equipment), you don’t have to pay taxes on your earnings.
You may get a break on your state taxes. Your state might offer you a tax deduction for contributions to 529 plans but may impose limits per beneficiary and per taxpayer.
You can choose an investment track based on the age of your student. You can also choose investments based on how much exposure to risk you want your investment to have. That means you can choose more conservative investments if you don’t want to risk losing money or more risky investments if you want the potential to earn more returns.
You don’t have to stick to your state. If another state offers options you like better, you can invest in their 529 plan. But don’t forget to look into whether you’ll still qualify for an income tax deduction.
You can accept contributions from relatives. Anyone can contribute funds to an already-established 529 account. And a grandparent or relative can open a 529 account and name anyone as a beneficiary.
You can change investments. Don’t like your initial selection? No problem. Federal tax law lets you change investments twice a year or when there’s a change in your beneficiary.
As with any investment, the earlier you get started, generally the better. Ideally, you want to start saving for college as soon as your child is born. However, it’s never too late to begin, even if your child is a second-semester senior.
My approach: Know your why.
Taking the leap into investing can be overwhelming, especially if you’re new to the stock market. But deciding how to invest your money just requires you to be real with yourself — and that starts with knowing your why. In other words, why are you investing and when do you need the money? This will help you choose the best investments for your own situation.
Here’s my why. I’m a long-term investor. (My emergency fund is kept in a savings account, as are any funds for short-term spending goals.) So when I invest, I typically think about 10 to 15 years down the road. For me, riding the market’s (proven) long-term growth is easier than trying to find the next big thing. Stocks can be affected by various, inexplicable forces in the short term, but a diversified stock portfolio has proven to deliver consistent returns over several years. Fun fact: The S&P 500 has returned about 8% a year, on average, since 1950.
Because of this, if I have $5,000 to invest, I’m going to invest heavily in broad-market exchange-traded funds, or ETFs, or funds that track a major index, like the S&P 500. That’s not a recommendation, though – it’s just what would work best for me.
This approach fits more than just my personal investing time horizon — it also aligns with how much time I want to spend choosing and maintaining my investments. Not enough investors factor in time when they’re deciding how and where to invest. But time is money, after all.
I also like having some control over my portfolio, but I don’t have the time to search for short-term opportunities in the market. The solution? I own a piece of everything by investing in broad-market funds.
When it comes to this aspect of investing, you have options. You can invest in active funds (in which a portfolio manager identifies investment opportunities) or passive funds (in which you just own a group of stocks). You can also look into managed funds, where you pick your goals and themes, and your investments are automatically selected for you. You’ll pay fees for this, though.
That being said, I also like to invest a small portion of my money in individual stocks and sector ETFs I believe in. So I’d invest some of the $5,000 in those. It’s OK to invest in a company you think is cool — just know your timeframe and don’t invest money you’re not prepared to lose. In other words, know your why.
My approach: Interview yourself.
When you are just starting out, regardless of how much you have to invest, you should ask yourself two questions:
What is the goal of your investment?
What is your investing style?
Knowing your goal will help you determine how much risk you can responsibly take. For example, if you’re investing for retirement in 40 years, you can take on more risk than if you’re retiring in 10 years. And if you’re investing to pay for your child’s college education in 15 years, your risk tolerance is somewhere in between. The further away your goal, the more risk you can take.
This connects to your portfolio’s allocations – higher risk means you can put more of it into stocks rather than bonds since you have more time to ride out any volatility the market might experience.
Next, you need to figure out your investment style. Are you someone who wants to be hands on with your investments? Or do you prefer a “set it and forget it,” more passive approach? Or are you, like many, somewhere in the middle?
If you want to be an active investor, you’ll need to research the companies you’re interested in before making any investments. In the beginning, as you build your expertise, you should spend most of your time on research and only a small portion of trading stocks. But if you prefer to be a more passive investor, it is about determining your asset allocation and which funds you’ll be investing in. I am a fan of keeping things simple with low-cost index funds and ensuring your allocation lines up with your goals.
I fall somewhere in the middle of these two investing styles. I want to feel like I’m in control of my investments, but I don’t have the time to analyze a lot of companies. So, if I have $5,000 to invest, I’ll invest the bulk of it in index funds and a small percentage in a portfolio of dividend stocks. These securities pay out a quarterly or annual dividend, providing me with the opportunity to do a little bit of “responsible” active investing. As an entrepreneur with irregular income, the dividends are a nice insurance policy of passive income.
That’s the beauty of investing in the stock market — you can adjust your approach tomorrow — or whenever the answers to your interview questions change.
Melissa Brock spent 12 years in college admission and is the founder of College Money Tips. She also writes financial content, serves as the Money editor at Benzinga and loves helping families navigate the college search process. Check out her essential timeline and checklist for the college search!
During her tenure as senior investment strategist for Ally Invest, Callie Cox helped educate Ally Invest customers about the financial markets through engaging content and strategic initiatives. Callie has worked in financial research for her entire career, with stints at LPL Research, TABB Group and Bloomberg. Her work has been featured in Bloomberg, the Financial Times, Yahoo Finance, and Barron’s (among other publications). You can also find her on Twitter at @callieabost.
Jim Wang is the founder of personal finance blog Wallet Hacks. He uses his engineering background to demystify complicated financial topics to help you achieve your goals. Jim has been featured in The New York Times, The Baltimore Sun, Entrepreneur magazine, and more. He lives in Maryland with his lovely wife and four children.