The $5k challenge: smart ways to invest $5,000 for the short-, middle-, and long-term

Men's Fitness, May, 2004 by Nate Millado

If you're sitting on a bit of savings or came into some quick bank--a bonus from work, for example--letting it ride in Vegas is not the first option that should leap to mind. We asked portfolio manager Fred Siegel, author of Investing for Cowards, for the best ways to grow five big ones.

IMMEDIATELY IMPROVE A SHAKY FINANCIAL SITUATION

Don't waste your money on car or student-loan payments. Instead, pay off your credit card debts, which usually carry interest rates as high as 18% to 20%. If you knock out a large chunk of that debt, you may also qualify for a lower-rate credit card, to which you can then transfer the remainder of your balance. Added bonus: You'll improve your credit rating so you can refinance that car loan and eventually qualify for a mortgage if you don't already have one.

BEST RETURN WITHIN FIVE YEARS

If you go with certificates of deposit (CDs), you're guaranteed your original investment plus the interest rate you have locked in. For a five-year CD at 3.75%, that's around $6,010.50 after five years. You can also consider an index mutual fund, like the S&P 500 (symbol: SPY) or the Vanguard 500 index fund (symbol: VFINX). With those, you don't have to make a lot of decisions because you don't have to pick your own stocks and sectors. "As long as your horizon is three to five years, you should be in good shape, since historically, the S&P has averaged a 10.3% return since 1929," says Siegel. After five years, that's about $8,052.05.

LONG-RANGE PLANNING

For long-term objectives, you can generally be more aggressive because time is on your side. If you invest about $3,000 in a standard mutual fund, you can use the rest on a riskier, small-stock fund, such as the Nasdaq-100 index (symbol: QQQ). This includes tech companies like Microsoft and Intel, which tend to be more volatile but will yield a higher return over time. Your diversified portfolio could total around $13,750.09 in just five years.