How to Invest 5k

It’s been said that positive advice (recommendations), as opposed to negative advice (things to avoid or NOT do), is the realm of the charlatan. In our opinion, this saying holds true when it comes to the question of how or where to invest 5k.

Experts and novices alike can write beautiful articles on where people commonly invest 5k and provide tips for answering the question of “what can I invest in with 5k?”. At the end of the day, there are many ways to invest 5k and no one can guarantee the success of any recommendation.

Keep in mind, that if someone tries to give you a specific and simple answer to the question of how to invest 5k, they may not know what they’re talking about.

For example, most bloggers are looking to increase visitors with minimal effort. Many times, ideas are copied from originalist (or high ranking) blogs and rewritten to make new “original content” regardless of whether any new information has been added.

It can be argued that a blogging model creates an incentive for improving the level of quality content through competition, but it also creates an echo chamber where people are looking at everyone else’s content and trying to cover the whole smorgasbord.  Sometimes less information with real perspective, or experience, conveys more value.

There are many opportunities for investing 5k, ranging from index funds all the way to high-risk investment options such as starting a new business or buying various cryptocurrencies. But just because there are many types of investments where you can invest 5k, doesn’t mean you should simply pick one. 

This article will focus on some information to help you develop your own perspective about managing a small potential investment to avoid taxes, fees, and penalties as you consider the question of where to invest 5k.

Common “Best Ways” to Invest Small Amounts

Here are some commonly promoted approaches for investing a small amount:

  • Contributing to a 401(k)
    • This can help you get as much of the available employer match as possible while investing within the account. 
    • You would face a penalty if you needed to make a withdrawal before age 59 ½.
  • Investing through a Robo-advisor 
    • This may be a tax-qualified account or a brokerage account.
    • A robo-advisor is supposed to automatically choose and rebalance a range of investments to match your risk tolerance with a lower management fee than might be charged by a live-person advisor.
  • Contributing to an IRA
    • With an annual contribution limit of 6k for most people, an IRA can easily accept an investment of 5k and provide a tax incentive as well. Investments would then be made within the account.
    • Similar to a 401(k) you would face a penalty if you needed to make a withdrawal before age 59 ½.
  • Buying a CD
    • Buying a CD through a bank can be a way to earn interest on the money you don’t need for a few months or a few years. 
    • A small CD with a bank will likely be insured by the FDIC (if your total deposits with that bank are not over 250k). With this protection, you can be sure of not losing money if you don’t have to access the money before the term of the CD expires.
  • Saving in a Money Market Account
    • Money market accounts with a bank also provide an opportunity to earn interest without taking much risk or sacrificing liquidity, but returns are usually extremely low. 
    • These accounts are also FDIC insured, similar to CDs.
  • Contributing to a 529 Plan
    • If you know you have upcoming expenses for qualified education, a 529 plan may provide a way to save for these expenses.
    • You can potentially earn a little extra from investments made within the account in the meantime.
  • Contributing to an HSA
    • If you have a High Deductible Health insurance Plan (HDHP) and know you want to save more for out-of-pocket health expenses, contributing to an HSA can provide a tax incentive.
    • Assets in an HSA can be invested before they are needed for health expenses or withdrawn in retirement, similar to other tax-qualified plans if the funds have not been used for health expenses.

Within various types of investment accounts there is a range of investment options which usually include:

  • Stocks
  • Bonds
  • Mutual Funds & Index Funds
  • Exchange-Traded Funds
  • And more

Note: Investments in an employer-sponsored retirement plan such as a 401(k) are commonly limited to 20-30 pre-selected investment choices which usually include mutual funds. CDs and Money Market Accounts are banking products and do not have any of the investment options mentioned immediately above.

Building Your Financial Foundation

Many people looking to invest a small amount may be better off building a stronger financial foundation before rushing to consider investment options. Why? Because life happens, and it doesn’t always happen the way we think it will. 

When life happens, you often need protection and LIQUIDITY before investment growth. When investments don’t turn out or liquidity is rough, it is wise to have money available that you can access without having to consider the following issues:

  • Penalties will likely apply if you must withdraw money from a tax-qualified plan.
  • Selling investments in a down market, rather than waiting for the market to “bounce back” is an issue that many people face when lacking a strong foundation of liquidity.
  • Taxes may apply if you must sell investments that did appreciate. If you need to access money from these investments in the future, it may not be at the time you would really want to trigger the tax bill by selling.
  • Fees will almost always take a portion of your investment regardless of how you invest. If you need to build liquidity the return on liquid investments tends to be very low, but fees are still subtracted regardless of performance.

The way to avoid these consequences from becoming your only option to access liquidity in the future is to build a strong foundation of liquidity outside of investing. Ideally, you want such an asset to provide protection and liquidity, as well as earn a similar or better rate than you could in a bank savings account. And, of course, you want high liquidity you can access at any time (unlike a CD). 

So how stable is your financial foundation right now? A visual model using a toy donut stack may help you decide if you’re ready for investing. The elements include:

  1. Protection
  2. Savings (think emergency savings and liquidity for future purchases)
  3. Paying off Bad Debts
  4. General investing with prudent consideration of risk
  5. Higher-risk investments with a greater degree of speculation

Get any of these elements out of balance or out of order and you could be setting yourself up for hard times in the future. Check out this video with an explanation:

If you don’t know exactly what your cash flow picture looks like, the 10-20-70 system may help you to sort this out. 

Using Life Insurance as a Financial Tool

A participating whole life insurance policy that is designed sustainably for high cash value will often fit the bill perfectly for building a strong financial foundation along with protection before seeking typical investments.

Life insurance is an asset purchase – not an investment. Some people believe whole life insurance is not a good tool for building liquidity because cash values can take a long time to materialize if the policy is not designed to maximize cash value.

A well-designed policy will still take time to build, but the cash values can be growing more than the premium paid each year by about year 4 or 5. Usually, between years 8 and 15 a well-designed participating whole life insurance policy will have more cash value than all the premiums ever paid, and the cash value will continue to grow by more than the premium paid each year.

At this point, you are basically getting paid to buy the life insurance. You could cash out the policy at this time and walk away paying taxes on the growth above premiums paid, but most people want to keep an asset that is growing by more than what they put in each year.

A well-designed whole life insurance policy continues to be a great source of liquidity via policy loans if needed.  The permanent death benefit protection is also present.  The overall cost of purchasing this type of whole life insurance is less than buying term insurance for the same level of protection over a long period of time.

Building life insurance cash values can also help your retirement strategy. We find that people who have a good balance of their portfolio assets in life insurance have more options for passive income as they approach retirement than a portfolio of investments alone.

These people also have less reason for immediate concerns about market volatility since they can draw passive income/liquidity from life insurance cash values in years where invested accounts are struggling.

At McFie Insurancewe focus on designing participating whole life insurance policies with high cash value growth to help you build a strong financial foundation.

Whether you have started investing yet or not, a well-designed life insurance policy can provide more flexibility and liquidity to your financial options than you might have with an assortment of investments alone.


If you have 5k sitting around, yes you likely have some better options than just keeping it in a saving account with your bank.

If you’re looking to achieve financial freedom, it makes sense to start building for this goal as soon as possible. Investing may be part of your plan, but we believe it’s also wise not to take unnecessary risks by investing too early in the process because this could limit your options in the future.

To find out how the life insurance strategy may complement your investing, check out our Quick Start Guide. To see how the numbers for a policy would look in your situation, call us at 702-660-7000 and ask for a complimentary strategy session.

Note: Investing information provided on this page is for educational purposes only. McFie Insurance does not offer advisory or brokerage services and does not recommend or advise investors to buy or sell particular securities.

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