7 of the Best Ways to Invest $5,000

Here's the best ways to invest $5,000.

Whether you're a new investor with a $5,000 windfall, a steady saver or a seasoned financial pro, there are many ways to invest. Several ways to invest $5,000 are tried and true, while others, like bitcoin are only for the aggressive speculators. But, there's no perfect answer when asking, "What are good ways to invest?" The best way to invest $5,000 depends upon your age, risk tolerance, financial situation and time horizon for the investment. Here are seven ideas to deploy your next four-figure sum.

Invest like Warren Buffett.

When wondering, "How do I invest my money?" it's reasonable to look to one of the smartest investment minds of this generation. Warren Buffett instructed his estate to invest in an S&P 500 index fund and treasury bonds for his heirs. For new investors or anyone who believes that the U.S. economy is strong and major U.S. and global brands are likely to grow into the future, this one of the best ways to invest $5,000. Investors can look at the Vanguard S&P 500 Index Fund Investor Shares (ticker: VFINX) and Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX) in percentages that reflect the investor's risk comfort level. Aggressive investors will tilt toward the stock fund and conservative investors will deploy more money into bonds.

Invest in high-quality dividend stocks.

For current income and long-term capital appreciation, investing in stalwart dividend stocks is a time-tested strategy, says Gregory Powell, deputy chief investment officer at Miller/Howard Investments in New York. High-yield dividend stocks consistently outperform the S&P 500. Investors can implement this approach by screening for companies with growing dividends, or buying a dividend aristocrat fund like ProShares S&P Dividend Aristocrats ETF (NOBL) or Miller/Howard Income-Equity Fund (MHIDX).

Create a diversified portfolio using buckets.

With $5,000, an investor can allocate the money among several buckets in appropriate percentages to meet his or her investment goals. Ryan Marshall, certified financial planner at Ela Financial Group in Hawthorne, New Jersey, recommends investing in funds from these asset categories: dividend-paying growth and income stocks, growth stocks, aggressive smaller company stocks, international stocks, and bond funds. The allocation to bonds could be increased for more conservative investors and decreased for aggressive folks. This diversified approach helps cushion the blow when one asset class declines, as others may hold steady or increase in value.

Fund a 529 plan for your child or a relative's education.

"A 529 college savings plan offers among the best methods of investing $5,000, by allowing for tax-deferred growth and tax-free withdrawals of the initial investment and providing the foundation for educational opportunities that can dramatically increase lifetime earnings," says Judith Corprew, executive vice president at Patriot Bank. These state-sponsored accounts offer a way to invest in a variety of stock, fixed income, or guaranteed return investments within one's own state or another. The money within the account can be withdrawn to pay for tuition, fees, room and board, books and other school supplies. The withdrawals, if used for designated educational expenses, are federally tax-free and if the owner invests in his or her own state's plan the withdrawals are also free of state tax.

Invest in international bonds with higher yields.

With low interest rates in Europe and the U.S., it's tough to find higher yielding bonds. Mayra Rodriguez Valldares, managing principal at MRV Associates, recommends investment grade corporate bonds from emerging market countries like Mexico, Brazil and South Korea. "These are some of the most advanced emerging market issuers. These foreign bonds are of good credit quality, have liquidity and have higher returns than U.S. or European investment grade bonds," Valladares says. Investors can deal with a specialty bond broker for individual bonds or invest in an exchange-traded fund like iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB). This fund currently yields 5.46% with a year-to-date return of 13.3% and a low 0.39% expense ratio.

Take a risk with cryptocurrency.

For aggressive investors with an already diversified and sizeable investment portfolio, considering how to invest a small amount of money, bitcoin might be worth a look. But beware. Although millionaires have been made by investing in bitcoin and other cryptocurrencies, fortunes have also been lost. Bitcoin has grown from approximately $131 in May 2013 to $10,000 recently for a 7,500% gain. The remarkable bitcoin long-term gains mask the volatility. On January 20, 2019, bitcoin traded at $3,442 and peaked in 2017 at more than $14,000.

Fund a health savings account.

For those covered under a high deductible health insurance plan, an HSA is a superb investment vehicle. Although designed as an account for individuals and families to save tax-free for out-of-pocket medical expenses, an HSA can also be used as a supplement to other retirement savings accounts, especially if the account owner can pay medical expenses from another source. In 2019, the law allows individuals to contribute $3,500 and families $7,000 to an HSA. Depending upon the type of HSA account, owners can invest in both fixed and equity investments and all income and capital gains grow tax free. "You can use an HSA just like a 401(k) or IRA," says Shobir Uralil, chief operating officer and co-founder of Lively, an online HSA provider.

Tips to invest $5,000:

-- Invest like Warren Buffett.

-- Invest in high-quality dividend stocks.

-- Create a diversified portfolio using buckets.

-- Fund a 529 plan for your child or a relative's education.

-- Invest in international bonds with higher yields.

-- Take a risk with cryptocurrency.

-- Fund a health savings account.