Taking the time to look at all your investment opportunities will help you determine the best way to invest $10k
An old joke claims that the best way to double your money is to fold it in half and put it back in your pocket, but the truth is a lot more complex. Due to inflation, your money loses its real value fast. Although it’s tempting to hold on to cash for a rainy day, you're better off investing your money so it will grow in value. So, imagine you have a sum of money, say $10,000, and want to put it to use. What is the best way to invest $10k?
Rather than letting that money sit in a low-yield savings account losing net worth, there are some simple things you can do to put that money to work for you and strengthen your financial outlook. A word to the wise, however, from Loren, a legal Expert on JustAnswer:
“All investing involves taking some risk. FDIC-insured CDs, gold coins, even greenbacks hidden in a mattress all have risks, although of different types. The primary risks in investing are: poor or negative return on the investment, loss of the money invested, and loss of purchasing power to inflation. The primary technique for reducing risk is the use of diversification, which can be summed up as putting your eggs in different baskets.”
So, how do we make the best use of the $10,000 in our thought experiment? The first thing to do is figure out what you're trying to do, which means setting some goals for the money.
Defining your investment goals
Depending on your situation, you may have different needs that your investment will have to address. Determining the best investment plan for your needs will require you to consider factors such as:
- Financial stability: If you're living paycheck-to-paycheck, investing in the stock market probably isn’t the best use of a lump sum of cash. If you're reasonably secure and want to build for future stability, though, it makes a lot more sense. Your current financial situation will have a large impact on the kinds of options you should be considering.
- Your needs: The amount of return that you want to see from your initial investment will have a large impact on the kinds of choices you will make. While bigger returns are always preferable, you should have a target amount in mind and a purpose for that target, whether you’re saving for a home loan or starting to plan for retirement.
- Timeframe: Saving for your teenage daughter’s college education doesn’t leave you the same set of options as planning for your retirement in 25 years. Long-term stable growth is one of the safest investment strategies, so the more time you have, the better your chances of success. The amount of time that you have in which to meet your financial goals will require that you make different kinds of choices.
Risk aversion: Generally speaking, big returns aren’t safe, and safe returns aren’t big. In theory, the more willing you are to take chances with your money, the bigger returns you can get back. In reality, it usually doesn’t work out, and fortunes can be lost in the blink of a company’s bankruptcy filing. You need to find your own comfort level with the risks of investing, and be realistic about the kinds of returns you'll see from your choices.
- Involvement: If you're investing in stocks, how active a hand do you want to take in the details of your investments? Your options range from robo-advisors that use algorithms to make investment decisions for you, to day trading based on your own grasp of the fluctuations of the market.
Your answers to these questions will help you define your investment goals, and to figure out how to meet them. Having a strategy is the key to figuring out the best way to invest $10k for your needs.
Exploring safe investments
Before you start worrying about assessing risk in the stock market, though, there are some easy and safe investments you should explore.
- Investing in yourself: Are there any immediate uses for the money that would be more lucrative? The first thing you should do is to make sure you have an emergency fund to cover expenses for a few months in case of injury or job loss. Then look into ways to use the money to improve your immediate circumstances. Could you pay off credit card debt and reduce your monthly payments? Is there a certification program you could take to advance your career? Improving your financial stability is sometimes the best investment you can make.
- Maximizing your 401(k) contribution: If you're in a secure financial situation, you have more options available to you. The best investment you can make at this point is to increase your contribution to the maximum that the company will match in your 401(k). The company match is simply free money, and you won’t find as sure a return anywhere else. Maximizing your contributions will decrease your regular pay, but you can use some of the $10,000 to offset this loss in income.
- Opening an IRA: An individual retirement account, or IRA, is the next best investment you can make. An IRA is essentially a 401(k) that isn’t sponsored by your company. You can invest up to $5,500 annually into an IRA. The advantage of an IRA is that you don’t pay taxes on the accrued interest. Instead, you get to choose between a traditional or Roth IRA. The traditional IRA allows you to take a tax deduction for your contributions, while the Roth IRA allows you to withdraw without paying capital gains taxes; your financial situation will dictate which type of IRA is the best for you.
These are some of the first steps that you should take to put your $10,000 to good use.
Making riskier investments
But what if you have your finances in order, and you’ve already maxed out your 401(k) and IRA contributions? Or, what if your goal isn’t to save for retirement? Then, it may be time to consider investing some money in the stock market. The $10,000 in our thought experiment would go a long way towards establishing a stable investment portfolio.
To invest in the stock market, you'll need to open a brokerage account. You don’t get the tax protection that's offered by IRAs and 401(k) plans, but taxed growth is still better than no growth! A good broker will offer you planning advice and tools to help you invest successfully.
At the $10,000 level of investment, your best course of action is to stick to broad-based investments such as mutual funds and exchange traded funds (ETFs), These are investments that follow the performance of segments of the market, insulating you somewhat from the volatility of trading individual stocks.
If you do have a taste for the thrilling world of day-trading stocks, you should limit your high-risk investments to 10 percent of your portfolio, and maintain a majority in safer investments.
There's a steep learning curve to investing in the stock market, and it is easy to find yourself overwhelmed. To help you with the process, take a look at our introduction to investing money in stocks.
The most important thing you can do is to get started investing early. The longer you have to meet your goals, the better your chances of success!
Even when you have decided on the best way to invest $10k, your plans will end up changing with the market. This is when a little knowledgeable information can really make a difference. The Experts on JustAnswer are available to offer quick and insightful answers to your financial questions!
How would you invest $10k? Tell us in the comments!