Best Ways to Invest $10,000: A Step-by-Step Guide

Investing, Investing Strategy, Investments
The 5 Best Ways to Invest $10,000
Your definition of windfall may vary, but there’s little argument that $10,000 is a healthy chunk of cash — certainly enough to give you cold feet when deciding how to invest it.

The good news is there are a lot of options: $10,000 is enough to more than meet most online broker minimums.

We’ll help you walk through those options below. But first, it’s important to pinpoint your investing style.

Hands-on or hands-off?

If you’re new to this game, you might not know what your investing style is. So we’ll make it easy for you: Are you really looking for someone or something to invest this money for you?

If so, you might be interested in a robo-advisor. Robo-advisors are computer algorithms that manage your investments in accordance with your goals. You’ll pay an annual management fee of around 0.25% for a robo-advisor to build and manage an investment portfolio for you. (Want to know more? Get all the background on robo-advisors here.)

We’ve taken a close look at the leading advisors and compiled our favorites, based on crucial factors like fees, investment portfolios and customer service. Wealthfront, the company that tops that list, manages the first $10,000 you invest free.

» NerdWallet’s picks: The best robo-advisors

If, on the other hand, you want to learn how to invest this money yourself, read on for a step-by-step guide to where and how to do that.

1. Pinpoint your goal

The endgame is important here, because it — and when you want to reach it — is a key factor in how you should invest this $10,000.

If your goal for this cash is short-term — that long-awaited engagement ring, next year’s summer vacation — you probably don’t want to invest at all. Generally, money you need in five years or less should stay out of the market. Instead, check out our suggestions for how to invest for short-term goals here

If your goal is long-term — retirement being the most common in this bucket — you absolutely want to invest, because that time will give your money a chance to grow.

2. If you have a 401(k), get your match

A guaranteed investment return is as rare as free money, and a 401(k) match gives you both: When you put dollars into the account, your employer puts dollars in, too. How many dollars depends on your plan’s matching arrangement, but 50% to 100% of your contributions up to a limit of 3% to 6% of your salary is a pretty common range.

This $10,000 windfall may give your budget the room it needs to finally start meeting that match, if you’re not already. The hitch: You typically can’t just make a lump-sum deposit to a 401(k), so you have to get a little creative if you want to get this cash into your plan and capture matching dollars while you do it. Put the $10,000 into a savings account, then set your 401(k) contribution to the level your employer matches. When that contribution is swiped out of your paycheck, repay yourself from the money in savings.

3. Max out an IRA

An IRA is like a 401(k) you open on your own, which means no match. But it has other benefits, including a wide investment selection, and if you don’t have a 401(k) at work — or you’re already meeting your 401(k) match — an IRA is far and away the next best thing.

That $10,000 is more than enough to max out an IRA for the year. The annual contribution limit is $5,500 right now (with an extra $1,000 allowed for those 50 or older). You can choose to contribute that to a traditional IRA, which will get you a tax deduction on your contribution. You’ll then pay taxes when you pull the money out in retirement.

If you’re not concerned about that tax deduction, you might choose a Roth IRA. In a Roth IRA, you don’t get a tax deduction on contributions, but distributions in retirement are tax-free. Generally, a Roth IRA is best if you think your tax rate will be higher later than it is now.

» Need to open an IRA? Here are the best account providers.

4. Use a taxable brokerage account

If you’re already on track for retirement — 401(k) is matched, IRA is funded — or you’re investing for a long-term goal that isn’t retirement, you’ll want a taxable brokerage account, which you can open at any online broker.

Unlike an IRA or 401(k), there isn’t a tax break here. But a brokerage account allows you to access a wide range of investments, and because there is no specific goal for this account, you can take distributions at any time and contribute as much as you’d like.

» Don’t know where to open a brokerage account? Read through our picks for the best brokers for beginners.

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5. Select your investments

The investment account — 401(k), IRA, brokerage — is just a vessel; once you get that $10,000 in there, you need to select investments. You can pretty easily piece together a diversified portfolio of low-cost index funds or exchange-traded funds with $10,000.

Index funds, a type of mutual fund, typically have an investment minimum, but $10,000 is more than enough to buy into several. ETFs are a kind of index fund that trades like a stock. You buy them for a share price — that’s the minimum investment — and it could be as low as $50.

Both are baskets full of stocks (or bonds, depending on the type of fund you’ve selected). When you use them, you get exposure to stocks without actually having to pick individual stocks.

But maybe you want to pick stocks. Go for it, with one caveat: We recommend limiting stock trading to 10% of your portfolio or less. If $10,000 takes a bigger bite, maybe you trade stocks with the portion that overflows your IRA contribution limit or set aside just a small chunk of this money to play the market.

» Want to know more? Here are our detailed guides for how to invest in stocks and how to invest in index funds

Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.