You got a bonus at work. You’ve been stockpiling cash for a while. Your Great Aunt Mabel left you a small inheritance.
However you’ve received the money, you have an extra $10,000 to your name, and you’d like to invest it wisely. But what exactly do you do?
Whether you’re new to investing or looking to expand your current portfolio, here are a variety of ways you can put that extra money to work.
(Note: We’re assuming you don’t have any debt other than a mortgage and that you already have a suitable emergency fund. If you’re swimming in credit card debt, or living paycheck-to-paycheck without savings, prioritize debt payoff and emergency-fund creation. Investing comes later.)
Traditional Investment Options
1. Major Indexed Stock Fund
Index funds, mutual funds and exchange-traded funds (or ETFs) are a good place to start your investment journey. These funds allow you to diversify your investments across a range of sectors and businesses.
You can find low-cost funds with minimal fees through Jemstep’s robust platform, which will also guide your asset allocation so that you’re not over-represented in any particular sector. You don’t need to worry about doing a ton of research, falling for a trendy stock that will quickly plummet, or paying an investment manager through the nose to manage your money for you. You can use Jemstep to complement your relationship with your financial advisor, if you choose to have one.
2. Combination of Stocks and Bonds
Even indexed stock funds carry some level of risk, so if you’d prefer an investment with lower volatility, use Jemstep’s platform to self-identify as a “conservative” investor. You’ll learn your ideal bond allocation, based on your risk tolerance, goals and age.
Generally speaking, stay away from allocating too much of your bond portfolio towards “junk bonds,” which promise a lofty rate of return but are much riskier than more traditional bonds. Stick instead with low-risk, investment-grade corporate or government bonds. (Jemstep’s service will give you specific buy-and-sell advice.)
For more information, check out this article on investing $10,000 into a diversified mix of stocks, bonds and other assets.
3. Retirement Accounts
Your contributions to retirement accounts like 401Ks and Roth IRAs are tax-deferred, and some employers offer matching contributions that let you multiply your investment – effectively giving you a “guaranteed” return on each dollar you contribute.
If you have an extra $10,000 in cash, ask your human resources department if you can withhold an additional $10,000 from your paychecks – redirecting that money towards your 401k. Live on the $10,000 that you have, and divert the equivalent amount into your company retirement plan.
Other Ways to “Invest”
The market doesn’t represent the only investments, of course. Here are some non-market ideas for your $10,000.
1. Your Education
Pursuing an advanced degree, a certificate program, or professional development courses can help you boost your value to your employer, obtain a better job or even branch off into a new career path you’ll enjoy more than your current one.
In addition to the potential raises, promotions and other bonuses this can create, education can also enhance your personal career fulfillment. This might motivate you to stay at your job for an extra year or two – perhaps retiring at 65 instead of 62 – which will have a tremendous impact on your retirement.
2. Real Estate
Your home is likely one of the biggest assets you own, and $10,000 can go a long way towards helping you build equity. You could put this $10,000 towards paying off your mortgage, which will give you a “guaranteed return,” so to speak, that’s equivalent to the interest rate on your loan. (It will also accelerate your amortization schedule, which means your future payments will be more weighted towards principal payoff rather than interest.)
Alternately, if you’re planning to sell soon but your home is a bit outdated, this money can help make essential repairs or revamp areas like your kitchen and bathroom. Updating the kitchen and bathroom tend to provide the best “yields,” recapturing 80 cents for each $1 that you spend, according to This Old House. In other words – while upgrades typically aren’t an “investment,” they might help you sell your home faster.
3. Buy a Rental Property
Another option, for those of an entrepreneurial bent, is to invest in a rental property to bring in extra income. The right rental unit in the right neighborhood can yield a “capitalization rate” (rate of return) between 5 to 15 percent, generating a nice income stream for you in the years to come.
$10,000 is enough money to make a 20 percent downpayment on a $50,000 property. (That might sound far-fetched, but there are properties in the Midwest and South that sell for those amounts. You’ll want to understand the neighborhood profile carefully, though, before you make a purchase. If you wouldn’t feel safe living there, you may not want to host tenants there, either. That said, there are good condition homes in safe areas that sell for five-figure sums.)
However, don’t buy a rental if you’re barely scraping together the down payment. You’ll need additional money for closing costs, holding costs during vacancy periods, repairs and maintenance, and other contingencies. Consider your $10,000 to be the “starting money” as you save for your first rental, and only enter this market once you have enough cash reserves to sleep soundly at night.
The bottom line? There are a handful of ways you can invest $10,000. Find the one that works best for your goals, personality, interests, risk tolerance and timeline.