May 25, 2021 5 min read
This story originally appeared on MarketBeat
Whether you managed to save $ 5,000 alone or got $ 5,000 in some way from an overly generous aunt, there are a variety of good (and bad) endeavors you can invest your money in. Consider investing your $ 5,000 in your 401 (k) or 403 (b), index funds, or a 529 for college.
Let’s go into detail about these three ways you can invest your money.
Option 1: Invest in your 401 (k) or 403 (b).
What type of retirement account does your employer offer? If you work for a nonprofit, your employer may offer a 403 (b). If you work for a for-profit organization, you may have the opportunity to invest in a 401 (k).
If you’re contributing to a traditional 401 (k) or 403 (b), contributions will be deducted from your paycheck before federal income taxes are deducted. This lowers your taxable income, so you may owe less income tax. You can contribute up to $ 19,500 for a 401 (k) or 403 (b) in 2021. If you are 50 or older, you can add an additional $ 6,500 and increase your grand total to $ 26,000 for the year.
The most exciting part of investing in a 401 (k) or 403 (b) is compound interest. When compound interest is accumulated, interest builds on interest. The compounding adds up over the years and the money becomes deferred for tax purposes until you withdraw your money in retirement.
The other exciting part of retirement planning involves the employer match. Your employer may drop in money to cover half or all of your contributions, up to 3% to 6% of your salary. Talk about a guaranteed return!
How can you allocate your $ 5,000 to your retirement account? Just go to your human resources office and make sure there is money withdrawn from your paycheck every month. Since the deduction is taken before you get paid, you won’t even miss a penny. Do your best to maximize your retirement savings up to $ 19,500 or $ 26,000 depending on your age.
Option 2: buy index funds.
Index funds aim to match the performance of a specific market index such as the S&P 500, which measures the performance of approximately 500 companies in the United States. You can also follow other indices like the Dow Jones Industrial Average and the Nasdaq 100.
How do you invest in index funds? You want to choose the right percentage of stocks versus bonds for your portfolio based on your risk tolerance and investment schedule. Next, open an account directly with the mutual fund company offering the fund. You can also open a brokerage account with a broker that you can use to buy and sell shares in the index fund of your choice.
Quick Tip: You can also invest in index funds through your employer through an IRA or your 401 (k) or 403 (b) plan.
Option 3: save for college.
Do you have a college bound kid? You might want to choose to invest your $ 5,000 in a 529 plan.
Why this $ 5,000 investing approach when you can invest in so many other things? One really big reason: Your child is more likely to go to college regardless of how much you’ve actually saved.
A study by the Center for Social Development at the George Warren Brown School of Social Work at Washington University in St. Louis found that students were seven times more likely to attend college than children without bank accounts.
The study found that a college savings account is a better indicator of whether a child would attend college than their parents’ race or wealth.
When you invest in a 529 plan, you have:
- You don’t pay federal taxes and you may get a discount on your state taxes. As long as you use the money on qualified college expenses, trade schools, and / or fees or expenses, you don’t have to give money to Uncle Sam. These qualified expenses include tuition and fees, room and board, books, and computers or computer equipment. Your state may offer you a tax deduction for contributions to 529 plans, but it can set limits per beneficiary and per taxpayer.
- You can choose investments based on your student’s age. You can also choose investments based on the risk you want your investment to be. In other words, you can choose more conservative investments if you don’t want to risk losing money, or riskier investments if you want the potential to generate more returns.
- Can choose another state’s 529 plan. If another state has options that you like better, you can choose that state’s plan instead. Don’t forget to find out if plans from other states still qualify you for income tax deduction.
- Can change investments. Don’t like your first choice? No sweat. According to the federal tax law, you can change investments twice a year or when you change your beneficiary.
Ideally, you want to start saving for college as soon as possible. Ideally, you will save for college right away – exactly when your child turns a month old (or sooner!).
Consider other ways to invest $ 5,000
You may be able to think of other ways to invest $ 5,000. However, remember that you want to take care of your own retirement first and should pursue these three options in the order presented. First, invest in your retirement plan through your employer to match the match your employer is offering. Then invest in index funds. Once you do that, you’ll save up for college. You can always borrow to help fund your child’s college education, but you cannot borrow for your own retirement!
Also, remember that the sooner you start saving, the sooner you start saving, the more you can save in the long run with any investment. Don’t think, however, that it is ever “too late” to get started, whether you are saving for retirement at 50 or saving for college when your child turns 16.
Sponsored Article: What is depreciation?