How to invest $5,000 in Australia (when you’re bored of the bank)

What's the best way to invest $5,000 in Australia?

Unfortunately there's no universally-agreed "best" way to invest $5,000, as much as we wish there was.

The average Australian has $37,915 in savings, according to Finder data¹, so $5K actually represents a decent chuck of the average person's spare cash.

This meets any investment decision you make should not be taken lightly, and needs to fit both your overall financial goals and risk appetite (more on that later).

According to Warren Buffett, arguably the world's greatest investor, the humble ETF is the best investment for normal people.

The aptly-named Oracle of Omaha told investors in 2020 that "in my view, for most people, the best thing to do is own the S&P 500 index fund."²

Where to invest $5,000

We don't like repeating ourselves, but this is important.

Before you start investing, you should ideally have cleared any of your outstanding debts first.

And there's actually a simple reason for this - the interest you're charged on debt may well be higher than the returns you can achieve through investing.

Putting your money in the stock market and getting a 5% return after a year is all well and good, but it may not have any meaningful impact on your financial position if you've also got credit card debt and are getting charged 20% interest.

In that situation, paying off your credit card would be a savvy financial decision.

1. 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 your post-tax income and earn up to $60,400 a year, the government will add up to $500 towards your super each year as well.

Compare super fund accounts

2. ETFs and index funds

Index funds like ETFs (exchange-traded funds) are an accessible, low-cost way to invest in a whole portfolio of stocks and other assets such as gold or property.

You can get exposure to an entire market index (like the S&P 500 or Nasdaq 100) with a single investment, in return for a small management fee. The cheapest ETFs in Australia currently charge an annual fee of 0.03%, but have average annual returns of up to 15% over the last 5 years.

Compare ETFs

3. Managed funds

Unlike ETFs and index funds, managed funds are actively controlled by professional investment managers.

Instead of building an investment portfolio yourself, you entrust your money to the expertise of a specific fund managers in the hopes they can outperform the regular stock market index.

Of course, 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.

To reference our old friend Warren Buffett again, while managed funds can outperform in the short-term, over a longer time horizon they often lag the market.

Buffett made a US$1 million bet in 2007 that a simple Vanguard S&P 500 ETF would beat the returns of a managed fund over a 10-year period. In 2017, he won the bet after the ETF out-performed the hedge fund manager's picks in 9 out of the 10 years.³

Managed funds also generally have higher minimum investments of around $10,000.

Compare managed funds

4. 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.

Compare share trading accounts

5. 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.

Compare robo-trading platforms

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, here are some options to consider:

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.

Compare forex trading accounts

What's wrong with a savings account?

Putting your money into a savings account won't necessarily give you the returns you 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 investment could drop in value by the time you need to use 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.

While your money is safe in a savings account, it does come with some drawbacks. While savings rates have been relatively high in recent times, so has inflation.

This means that your money may actually be going backwards in real terms if you leave it in a savings account.

Say you're getting a savings rate of 4%, but inflation is currently 4.5%. You're actually 0.5% worse off, and will still also need to pay tax on any interest you earn.

Finder survey: What are our main investment goals?

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.

Setting your investment strategy

Here are the 3 key things to keep in mind when deciding how to invest $5,000:

• 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.

To make sure you get accurate and helpful information, this guide has been edited by Joselle Delos Reyes as part of our fact-checking process.

Written by

Kylie Purcell

Investments analyst

Kylie Purcell is the senior investments editor and analyst at Finder. She has completed a Certificate of Securities and Managed Investments (RG146) and specialises in investment products including online brokers, robo-advisors, stocks and ETFs. See full bio

Kylie's expertise

Kylie has written 134 Finder guides across topics including:

• Investment strategies
• Financial platforms
• Stockbrokers
• Robo advisors
• Exchange traded funds (ETFs)
• Ethical investing
• ASX stocks
• Stock and forex markets