Disclaimer: The statements made in this post are the opinion of the author. They should not be viewed as financial advice. Please consult with a financial specialist before making any financial decisions.
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If you’re looking for a magic bullet to double your money or the next best stock tip I’m sorry to disappoint you, that is not what this article is about. And anybody that promises to double your money or that has that next stock tip is probably scamming you in some way.
Safe investing is true investing.
That being said, not all safe investments are created equal. If you came into $10,000 how would you safely invest it to ensure that it grows?
That is the question we’ll be answering and we’ll keep the reality of 2021 in mind as we do it.
So here are the top 10 best ways to invest $10,000.
Start or add to your emergency fund
According to Dave Ramsey, the well known finance and anti-debt guru, before you even start paying off debt you should build an emergency fund.
An emergency fund is there as a protection from accruing more debt when life happens. By having money set aside you can breath more easily, even while still in debt.
So if you don’t have an emergency fund, and you happen to have $10,000, put that money aside for emergencies.
How much you put aside is entirely up to you. If you’re in debt then Dave Ramsey’s suggestion is to put aside $1,000.
If you’re not in debt, then put aside more than that. Between 3 and 6 months of expenses should be sufficient, but do what ever makes you most comfortable.
For example, I have a pretty secure job as a teacher, barring getting removed for serious misconduct, I know I will be paid at least until August of each year.
If I am fired they are required by contract to let me know before the end of May and pay me through August, so I have a built in run way. That means I need less money.
If you are self employed and your income varies drastically each month then maybe 9 months or a year of expenses might be better.
Whatever your situation is will determine how big your emergency fund should be.
Put it in a high-yield savings account
This suggestion goes along with the first because the only money that should be in a high yield savings account is your emergency fund. It is not an investment by itself.
A high yield savings account is just a way of helping your money kinda sorta keep up with inflation. If a bank actually matched the inflation rate with a savings account they’d be losing money, but getting 0.5% or 2% in a high yield savings account (the number fluctuates depending on a number of factors) is much better than the national average savings account interest of 0.4%.
If your emergency fund is sitting in a regular savings account, or worse a checking account, then move it immediately. I use AllyBank, but I’ve heard good things about CITBank as well. Compare rates and services and decide whichever is best for you.
So, if you already have an emergency fund or are putting your $10,000 into an emergency fund then consider moving that money into a high yield savings account.
But, if you already have enough money set aside in a high yield savings account then adding more to one isn’t really that helpful.
Pay off your high-interest debt
Now that you’ve put on your armor it is time to kick the invaders out of the castle. Paying off debt.
If you have high interest debt then investing $10,000 won’t help you. Generally speaking an investment can hope to net you somewhere between 6-8% (considering fees and taxes and things like that).
So if you have debt that is higher than 6-8% interest you are netting more money than a good investment by paying it off faster.
Any credit card debt? Throw it at that. Students loans? Consider paying that down. Rent to own TV? Pay that off.
Paying off debt saves you money, but it also increases your cash flow. For every credit card you pay off you have at least the $25 monthly minimum staying in your pocket each month to use elsewhere.
You can use that money to more quickly pay off others debts (called the snow ball method) or to beef up your emergency fund.
In my opinion, paying off consumer debt is the right thing to do when you have extra money 90% of the time.
Get the full 401(k) match from your company
This doesn’t apply to everyone. Most teachers, for example, don’t get a company match because they are public employees. But if you work in the private sectors chances are your company offers some kind of employer match.
Whatever that match is, take it. It is free money and totally worth it.
Now a caveats. It is possible that the company match money needs time to be “vested”. That means that they will match it, but any money they match requires you to work at that company for a certain number of years (usually between 1 and 4, but I’ve heard of up to 7) before it is actually yours.
So if you are not planning on working somewhere long term, make sure they have a very low vesting period before you blindly go for the match.
Look into an HSA
One of my favorite investment vehicles is the Health Savings Account (HSA). An HSA is supposed to be a place where you can put tax free money in order to pay for medical expenses.
But that is only the start of it. Money put into an HSA is tax free. Then, in most HSA accounts, you can invest that money and it will grow tax free. And when you withdraw that money for medical expenses (or after retirement age) it comes out tax free.
This has been called a triple tax advantage account by the MadFIentist and he goes into it in a lot of detail.
The point is that an HSA has a lot of benefits, so it should be one of the first places you invest if you can open one (you need a high deductible insurance plan to do so) and if the fees make sense.
I moved my HSA from my employer sponsored company to Fidelity because Fidelity is basically free and the other company charged me $1.50 per month.
So make sure that you read the fine print when signing up for an HSA.
Look for other tax saving opportunities
If you are in a particularly high tax bracket, then looking for other ways to save on taxes would be beneficial. Accounts that defer taxes include the 401k, the 403b, the 457, and the IRA.
Investing in any of these you have access to can really reduce your tax bill.
One note to keep in mind though, these vehicles can only be invested in with income, often the income directly from your job.
So if you were gifted $10,000 what you’d have to do is increase the amount you contribute to you 401k, for example, with your HR department to 100% of your income until you’ve contributed the $10,000 and then bring your contribution back down to normal levels.
During that time you’d be living on the $10,000 as if it were your income.
If you don’t have a high income then reducing your tax burden may be counter productive. Instead investing in ROTH options such as the ROTH 401k, ROTH 403b, ROTH 457, and the ROTH IRA might be a better choice.
ROTH investments are taxed up front, but then grow tax free and you are not taxed on that growth. So assuming taxes increase which, lets be honest, they’re going to increase, investing in a ROTH now makes a lot of sense. Especially with a low income.
Since I make a teachers salary the ROTH makes more sense for me because I’m not saddled with a huge tax bill every year. When my income increases I might start dipping into tax deferred accounts to keep my tax bill down, but for now I don’t get a lot of benefit from it upfront.
Index Funds for easy investing
Now that we have the advantaged investment option out of the way, the next step is to invest in taxable accounts. There are investments that required money that has already been taxed to go in and any growth becomes taxable when pulled out.
There are so many things you could invest in, but the easiest investing option is low cost index funds.
Low cost index funds will give you, for the most part, the same return as the market in general. Over the past 30 years that has been around 10%.
The risk is minimal compared to individual stocks and the return is substantial.
Honestly, there isn’t really a more perfect investment option for the average investor.
If you invested the $10,000 in 1990 and left it in an index fund for 30 years, you’d have over $116,000 at the end of 2020.
There is a lot of power in set it and forget it index fund investing.
Feel free to use this calculator to run our own numbers on real historical data.
Invest in real estate
Another great option is investing in real estate. Now, unlike investing in index funds real estate investing usually takes more knowledge from the investor to do it right.
With $10,000 to invest you have a few easy options for investing in real estate though.
First, you could put money into a Real Estate Investment Trust (REIT). A REIT is basically like investing in stocks. You put money in and get money out without any say in how it happens or how much that is.
So if you want to diversify your investments, REITs are a way to go. But since REITs are basically stocks you might as well just invest in an index fund if you’re just starting out.
Second, you could invest in crowdfunded real estate. This is just a small step up from a REIT. Usually you have a clearer view of the investments in a crowdfunding situation, but you still have little to no voice in the process.
Really there isn’t that big of a difference here, so unless you need to diversify your portfolio then you might as well stick with index funds.
Third, you could use the money for a down payment on a home. Usually buying a principle residence is not something that I would call an investment because it takes money out of your pocket rather that put money into your pocket.
But, there are ways that buying a home with $10,000 down could be beneficial.
First, buying a principles residence gives you access to lower interest rates than investment properties. Unfortunately, it would have to be a low down payment first time home buyer type mortgage because $10,000 isn’t going to go very far on a down payment these days, but a lower longer term rate is probably well worth it.
Second, find a home that can produce income. There are a lot of ways you can make money off of your primary residence. You could Airbnb a room (if that is allowed in your city). You could rent out an Additional Dwelling Unit (ADU) like a mother-in-law suite. You could buy a duplex and rent out one side. You could even rent out storage space.
I bought land in Texas to build an airbnb unit, rent out land to campers, and rent out storage space all while enjoying a lot of quiet and privacy. There are a lot of ways to turn your residence into an asset instead of a liability.
Invest a small portion in a high reward but high risk option
If you have no debt to pay off and you already have an emergency fund setup then it is possible to use that $10,000 for the other investments listed above.
But sometimes it is hard to put money in an index fund and just watch it sit there getting an average return.
If you have the itch to invest in riskier, but potentially more rewarding investments, that is okay. Just don’t risk all of your moeny.
If this is you, consider putting no more than 10% of your money into a riskier investment, so in this case $1,000.
This can include putting money into your friend’s start up business, buying crypto, picking individual stocks, or betting it all on black (just kidding, please don’t do that).
The upside of these choices is huge, but you could lose all of your money as well. So please don’t put all $10,000 into these investments.
Use bonds to protect your wealth
If you are a bit further along towards retirement you may not want to invest your $10,000 at all, but when you look at the interest rate on a high yield savings account your stomach turns because it is well below expected inflation.
That is where bonds come in. A bond is an IOU from an organization, usually a government, that pays you interest for lending them money.
Since bonds are generally issued from governments, they are considered to be very safe. That means that, unless there is a major catastrophe, you’ll get your money back plus your interest. Since that catastrophe would most likely effect stock prices as well, bonds are definitely the safer of the two options.
So if you want to just keep that $10,000 and have it on hand for when you need it, but also keep up with inflation plus a little extra, bonds are often a great way to go.
Just make sure you do your research before blindly buying bonds because right now (mid 2021) a 30 year US treasury bond wouldn’t keep up with expected inflation. But there are other bonds out there, so look into that if you want to keep your money safe.
What Would I Do With $10,000?
Everybody’s situation is different, so please don’t read this as what you should do with $10,000. I’m also going to give my preferred method more generically because my situation can change from month to month so what I would actually do might differ.
For example, I have a small house payment on my tiny house that I plan on paying off with the proceeds from the airbnb rental. But if I suddenly had $10,000, I would pay it off right now.
One year ago, that would not have been a consideration, so keep in mind that what you do with money you get has to be based on your current situation.
First, pad my emergency fund.
As a lower income earner, it is incredibly difficult to build a solid emergency fund. So any time I get some extra money, I need to put some away for an emergency fund.
I would immediately put $2,000 toward my emergency fund just to have that on hand.
If you already have a more than substantial emergency fund then that obviously isn’t the right choice for you.
Second, invest in my HSA
As a public school teacher I don’t have access to an employer match, so I’m skipping that step. My best investment vehicle is an HSA because it is tax advantaged three times like I said before.
Since I have that option available to me because of my high deductible plan, I will put about $2,000 into that.
Third, invest in my ROTH 457
I have access to a ROTH 457 plan through my employer, which most people don’t. The benefit of the 457 is that I can access that money without penalty when I separate service from my employer.
I like that because it feels like an investable emergency fund with tax advantages. I won’t pay taxes on money I pull out of the ROTH 457 because I’ll be putting after tax dollars into it.
So I would increase my contributions for the next paycheck to $2,000, and just put an extra $2,000 from the $10,000 into my checking account to make up the difference.
I’d just have to remember to lower my contribution again after that paycheck has gone through.
Fourth, invest in real estate
I have taken the time to learn about real estate investing because I believe it is the best way for me to reach financial independence. Because of that, I am able to use the remaining $4,000 to help me buy real estate.
This could be going towards a down payment or cushioning my current investments so I’m prepared to buy more. It just depends on the situation.
At the moment I’m rehabbing (fixing up) a house I just bought so that I can rent it out and refinance it. That $4,000 would help grease the wheels of the project while I wait for money to come through from my lender and offer a better cushion for when unexpected surprises come up.
That’s how I would use it in general, but honestly if I got $10,000 tomorrow it would probably look slightly different because my situation changes often. That’s the beauty of personal finance, there is a definite art to the science.
How would you use $10,000? Are there any ways that would think the money could be used better? Tell me about it in the comments below.
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A list of definitions used on this blog can be found here.
Emergency Fund: Money set aside to be used in emergencies only. When you use money from your emergency fund you will need to replenish it as soon as you can.
High Yield Savings Account: A savings account that pays interest above the national average. Usually this is much closer to keeping up with inflation although it is a bit lower than that. While rates vary, around 1% is a high yield in 2020.
Inflation: Money losing value over time usually due to more money being put into circulation.
Cash Flow: Money coming into your pocket from investing (either through stocks, real estate, or other assets). This is NOT the same as income because it doesn’t necessarily require you to work for it.
Bonds: To raise funds for a project an entity (usually a government) will sell bonds or certificates saying that if you pay X amount now you will get X back with interest later. This gives them the money they need now and gives the investor interest on their original investment later.