5 Smart Money Moves to Make With $5,000 Right Now

Having extra cash is always a luxury, especially now as inflation remains stubbornly high. But knowing what to do with that money creates its own challenges.

Let's look at five smart money moves you can make with $5,000 right now, and a few examples of when you might want to choose one option over another.

1. Invest in the stock market

The historical annual rate of return of the S&P 500 is just over 10%. There's no guarantee that your investment will earn those returns in any given year, but even with its volatility, investing in the stock market is still one of the best ways to build long-term wealth.

For example, assume you took your $5,000 and opened a brokerage account to buy a low-cost index fund that tracks the S&P 500. If you earned the historic rate of return of just over 10% over 10 years, your $5,000 could become $12,968.

When to do it: Because of the stock market's volatility, you shouldn't invest money you need to cover regular bills or might need in an emergency. Instead, invest any extra money you can afford to leave in the market for at least several years and, ideally, much longer.

2. Open a savings account

Many high-yield savings accounts pay 5.00% interest or higher right now, making them a fantastic place for extra cash. For example, if you deposit your $5,000 in a high-yield savings account paying 5.00% interest, you could earn $250 in one year with virtually no risk.

The one downside is that savings account yields are variable. Banks can change the yield rate at any time, which could negatively impact how much you earn. Still, the best high-yield savings accounts are FDIC insured, making them a safe place to earn extra money.

When to do it: Savings accounts are best for emergency funds or for saving up for significant expenses, like a down payment on a house. If you need a place to store a sum of cash that you don't need for immediate expenses (but still want easy access to), put the money into a savings account.

3. Open a certificate of deposit (CD)

Another smart money move is to open a high-yield CD. Like savings accounts, some CD rates are above 5.00% right now, and you can find one that has a term length you're comfortable with.

For example, there are 1-year CDs that pay 5.00%, meaning that if you leave your money in the CD for the entire 12 months, you'll earn 5.00% interest on your investment. That would give you $250 from your $5,000 in just one year.

When to do it: Unlike savings accounts, the yield rate is guaranteed over the CD term length, as long as you leave your money in the CD for the entire term. If you take your money out early, you'll have to pay a penalty. So, only put money in a CD you're willing to part with for the entire term length.

4. Pay off credit card debt

The average American household has about $7,950 in credit card debt. This means that many Americans could benefit from paying $5,000 toward their balances.

For example, let's assume you have $5,000 in credit card debt with the current average APR of 24.6% and pay $250 toward the amount every month. In this scenario, it'll take 26 months to pay off, and you'll have spent $1,500 in interest payments! In contrast, adding $5,000 to your credit card balance would immediately eliminate that debt and save you from those interest payments.

When to do it: There's no wrong time to put large sums of money towards your credit card debt. Most cards have variable high-interest APRs, so paying your balance off as soon as possible is one of the best ways to improve your financial picture.

5. Open a money market account

Money market accounts are a blend of a savings account and a checking account, giving you the potential to earn a high annual percentage yield (APY) while still having easy access to your money via check-writing capability or a debit card.

With a money market account, you can earn yields of around 4.00% to 5.00% right now. While you have access to your funds, you can't take it out more often than the agreed-upon schedule, usually six times per month.

When to do it: Money market accounts are best for short-term savings, in which you want to earn interest but still want some access to your money. Some money market accounts may even offer promotional bonuses if you deposit a certain amount and leave it deposited for a designated amount of time.

Where you decide to put your $5,000 depends on your financial situation. I recently put a significant sum of money from freelance projects toward paying off credit card debt. That was best for me, but someone else would benefit more from investing that money. The important thing is to evaluate your financial situation and determine the best option for you.