How to invest $5,000 in Australia

Investing is only for the rich and you need a large sum of money before investing, but those are common myths.

In reality, investors can start small and quickly improve their financial position through the wonders of compound interest.

So, if you have a few thousand and are wondering what you should do with it, here are some handy hints on where you could invest $5,000.

Should you invest your money?

When investing, it's important to understand that there's always a risk versus reward payoff. For example, keeping your money in a bank account offers security, but your return on investment is very low or zero. You're barely beating the rate of inflation.

Your other option is to invest outside of the bank, such as in shares, exchange-traded funds (ETFs) or superannuation.

What are my options if I want to invest $5,000?

Learning about various investment alternatives matters because of the different levels of risk involved as well as commissions, fees and minimum deposits to think about. We share some of your main options below.

Pay outstanding debt

First, if you have any debt it's important to pay it off before you think about investing. This is because the interest you're charged on debt is likely higher than the returns you can achieve through investing.

Contribute to your superannuation

Contributing to your superannuation fund can be a great idea provided you're happy to have the money locked away for a long time. The best reason to top up your super is you can avoid paying your usual income tax.

Any contribution you make to your super straight out of your salary is only subject to 15% tax. If you make contributions from post-tax income and earn less than $50,564 per annum, the government matches your donations and this money adds to your super as well.

Compare super fund accounts

Managed funds and ETFs

Investment funds allow you to invest in a portfolio of stocks and other assets such as gold or property. Instead of building an investment portfolio yourself, you benefit from the expertise of fund managers.

Not all investment funds are successful, so before you invest, do your research and understand what kinds of fees you'll be charged and how the fund has performed historically. Most managed funds have a minimum investment of $10,000 while ETFs have a $500 minimum investment. For a $5,000 deposit, an ETF might be your better choice.

Shares

Although riskier, the stock market historically offers better returns than bank accounts. By buying shares, you're essentially owning a small portion of the company. If the company generates profits, you stand to earn dividends. You can also benefit from an increase in share prices.

The minimum initial investment in Australian shares is usually $500, so you can invest in one or multiple companies with your $5,000. Meanwhile, US stocks have no minimum investment requirement, so you can start investing as little as a few dollars into stocks if you choose, depending on your stock broker.

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Robo-advisors

Robo-advisors are platforms or apps that automate your investments. They provide a list of stock or ETF portfolios for you to choose from and you can deposit a few dollars at a time or thousands of dollars if you prefer. Head to our robo-advice homepage for a list of robo-advisors in Australia.

P2P platforms

Peer-to-peer (P2P) platforms allow you to lend your money to everyday borrowers in exchange for a fee. The lender is typically offered an interest rate on the amount they've deposited which varies depending on risk level and the P2P platform itself.

Minimum deposits range from as little as $10 up to $10,000 and the return you can expect is normally a fixed rate. Head to our P2P homepage to find out more and compare your options.

Term deposits and high interest savings accounts

Anyone looking for guaranteed returns can consider setting money aside in a term deposit or a high interest savings account. While a term deposit requires that you put your money away for a chosen period, high interest savings accounts offer easier access to funds.

Compare term deposits and high interest savings accounts

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What else can I do with $5,000?

Those with a high-risk tolerance could try options.

Options aren't really considered investing, but instead are trading.

This is because when you trade in markets such as forex, CFDs or futures, there's a high possibility you'll lose your money. In the case of CFDs and forex, most customers lose their money – so in some ways, trading can be more like gambling.

As always in investing, the higher the risk, the greater your potential to make a big return. If you're willing to take on the risk, below are some of the options you can choose:

Options

Options are contracts that let you buy or sell underlying assets at specified prices on specified dates, without actually having ownership. The period they remain valid for can vary from a few weeks to a few months. Investing in options requires that you learn the tricks of the trade well. Fail to do so and you may lose money.

Futures

You can benefit by investing in futures through considerable leverage. With $5,000 you can control a futures contract worth around $75,000. However, you may need access to additional cash if your broker makes a margin call. A risk to keep in mind is in the end, you could lose more money than you'd started off with.

Trading foreign exchange

You can benefit through leverage by trading currencies in the forex market, but you can also suffer significant losses. Similar to the futures market, leverage allows traders to make a significant amount of money from small initial investments in exchange for the risk of losing it all. Head to our guide on forex trading to find out how it works.

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How do I compare investment products?

• Minimum amount requirements. If you want to open a term deposit, the starting point is $500 or $1,000. Traditionally, you would have to start with something similar to get into the share market. However, investors who shop around can enter the market for as little as a few dollars both in Australia and with US stocks.
• Fees and commissions. Fees vary across different products. If you plan to invest in shares or ETFs, expect to pay some kind of brokerage fee. High interest savings accounts and term deposits tend not to charge any account-keeping fees.

What about a savings account?

Putting your money into a savings account won't give you the returns you might want. However, it comes with the least risk. It could be helpful if you need access to the funds over a shorter period.

Any money you need in the next 3 years is probably better to be in a savings account. This is because investing can be volatile and your capital could fall when you need the money.

It also has a major benefit of being government-backed and guaranteed returns. This means if an investor places up to $250,000 into a bank account, even if the provider collapses the government will guarantee your savings.

Although it's worth pointing out this is only to a maximum of $250,000, so anything above this is not guaranteed. Instead, investors could open multiple accounts with different providers.

While your money is safe in a savings account, it does come with some drawbacks.

Australia's current cash rate is still low at 2.35%, even though the RBA has been rapidly lifting rates in the last few months.

At the same time, inflation is still relatively high.

This means that your money is going backwards in real terms.

What are the risks of investing?

• Your capital can fall. Investing comes with risks. You can lose part or even all of your investment if it goes wrong.
• Limited information. A little research can go a long way in the world of investments even if you're putting your money in a seemingly simple asset like a term deposit. This is because not all financial institutions offer the same interest rate. When dealing with more complicated assets such as shares and futures, learning the intricacies becomes more important.
• Fees. When you invest your money, you'll use the services of a financial institution or a broker or both. Before you begin any such relationship, take the time to find out the cost of fees in different situations.

Is there anything else I should consider?

• Risk. In most cases, there is a direct link between the risk your investments face and the returns they generate. If you're looking at greater potential returns, it is only natural that you should prepare to take higher levels of risk. However, risk perception can vary and does not have a necessary bearing on statistical analysis.
• Risk profiling. Assessing your willingness to take risks and understanding how they can affect your judgement make up your personal risk profile. By going through the process of risk profiling, you address aspects such as risk capacity, risk required and risk tolerance. This helps you find out your optimal investment risks.
• Financial goals. Setting financial goals is crucial but you should measure how you're doing as and when required. When planning for retirement, calculate just how much money you'll require when the time comes.

Frequently asked questions

• Why should I diversify my investments?

  Diversifying your investments across different asset classes can help you minimise risk. You don't have to suffer much if any asset underperforms because benefits from other assets can often offset the same.

• Are there any risks associated with the share market?

  Yes. The value of shares can drop all the way down to zero. If the company you've invested in goes bankrupt, you stand to lose all your money.

• What are penny stocks?

  Penny stocks are stocks that trade at low prices, typically under $5. They tend to come with a higher risk compared to conventional stocks.