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Have you recently found yourself burning a hole with $10,000 in your pocket? While $10K might not seem like life-changing money if properly invested over time it could grow into a pretty neat reserve.
Whether it's a sudden windfall inheritance or winning the lottery let's take a look at the best ways to invest $10,000.
Open an IRA
Growing your retirement savings is a great use for $10,000. If you haven't already consider opening and funding an individual retirement account (IRA).
If you don't have a 401(k) plan at work an IRA is your first choice. It's also a good option if you want a better investment option than a workplace retirement plan. The best IRA accounts let you choose from a very wide range of asset classes giving you Extra flexibility.
Another strategy to consider is a Roth IRA. Contributing to a Traditional IRA gives you tax relief upfront while a Roth IRA gives you tax-free withdrawals in retirement. Additionally these rules allow you to make tax-free withdrawals until you reach retirement age.
Through 2022 you can contribute up to $6,000 a year to an IRA or $7,000 a year if you're 50 or older. Maximizing your contributions can help you stay on track to meet your retirement goals—and potentially leave you with a few thousand dollars to invest in some of the ideas below.
Mutual funds and exchange-traded funds (ETFs) help simplify investing and the best funds charge the lowest fees.
These collective investment vehicles have a portfolio of stocks or bonds designed to achieve well-defined objectives. Things like investing in specific market sectors to generate cash flow tracking the price of commodities like gold or imitating the performance of market indices like the S&P 500.
Ordinary investors can buy shares in any number of funds. When you invest each fund's management team handles the hard work of keeping the portfolio on track. In exchange for this convenience the fund charges an annual expense rate expressed as a percentage of your total investment.
You can buy mutual funds and ETFs using a brokerage account or IRA. Vanguard is recognized as a leading provider of both funds. Check out our list of the best Vanguard ETFs and the best Vanguard mutual funds for more information.
Build a Stock Portfolio
Buying individual stocks is riskier than investing in mutual funds and ETFs. But for self-directed investors who want to spend time learning about public companies and doing research this can be a great way to invest $10,000.
As you consider your options and research stocks keep in mind the importance of diversification. In conclusion don't put all your eggs in one basket. No matter how much you like a stock or company you should never buy a single stock worth $10,000.
Instead build a portfolio of stocks that are a mix of individual stocks preferably ones that offset each other's risks. For example if you invest in an oil company the company should do well if oil prices rise Down.
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A $10,000 bond might be a useful investment if you're looking for income.
When you buy bonds you are borrowing money from a company or government. You agree to hold the bond for a period of time and at the end of this period the bond issuer will refund your money. During this period the issuer pays you regular interest at a fixed rate.
Remember it's not impossible to lose money investing in bonds. If you want to sell your bond before the bond term ends you can find a buyer in the secondary market but you may have to accept less than what you paid depending on market conditions.
Also if a bond issuer is experiencing financial problems they may miss payments or even default on your principal investment.
Bonds with higher interest rates -- so-called junk bonds -- tend to be riskier. Like any investment there is always a trade-off between greater risk and higher returns. You can buy bonds through most brokerage platforms that offer stocks.
Buy Real Estate with REITs
In today's hot real estate market $10,000 won't get you very far when buying a property. But there is more than one way to invest in real estate.
For example try a real estate investment trust (REIT) a publicly traded company that gives you exposure to many different types of properties.
Most REITs specialize in one type of real estate -- such as commercial or residential -- although some REITs own a variety of different types of properties. To qualify as REITs companies must distribute at least 90% of their taxable income to shareholders making REITs also Great way to generate income.
Just like common stocks REITs are highly liquid. This makes it easy for you to cash out your investments and move funds elsewhere. By contrast owning physical real estate is a long and expensive process.
Prepare for healthcare costs with an HSA
A Health Savings Account (HSA) allows you to save and invest for future healthcare costs. Remember you can only open and fund an HSA if you have a high-deductible health care plan.
You can contribute up to $3,650 to the HSA in 2022. In return you get three valuable tax benefits.
First you can deduct your contributions from income tax. Once the funds are in your account you can invest them in different mutual funds and exchange-traded funds (ETFs) depending on your HSA provider.
Second you can defer income tax on your gains as long as they remain in the account.
Third when you spend money on health care expenses you can withdraw money from your HSA tax-free. That's right you'll never owe capital gains tax if you use your withdrawals for qualifying medical expenses.
If you don't need the money for health care you can also use the HSA for anything you want after age 65. You will pay income tax on withdrawals but no other penalties.
Considering Crypto? Be Cautious
Until recently cryptocurrencies were the hot new investment that everyone wanted. But if you've been following the news you probably already know that cryptocurrencies have fallen out of favor -- in part because of huge market volatility.
However even before recent market events the cryptocurrency had seen staggering gains and stomach-churning losses. Given the uncertainty and high risk involved in cryptocurrencies it is best to look elsewhere than cryptocurrencies to invest $10,000.
However if you are bent on investing in Bitcoin or Ethereum make sure it is something you can afford to lose. Also consider cryptocurrencies as only a small part of your overall portfolio no more than 5%. For more crypto investment ideas check out our top list cryptocurrency.
Focus on the long-term
Investing is a long game. No matter which assets you choose to buy with your reserves your investment performance will see gains and losses over the years. This is to be expected - your job is to stay focused on the future.
If you can earn a 10% annual return on your investment for 30 years your $10,000 could grow to $174,000—all without contributing a single cent on top of your original investment.
That's the magic of compound interest. On the other hand if you keep $10,000 in cash for 30 years you will only have $10,000. After the effects of inflation your $10,000 will have much less purchasing power than it does today.
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