(MONEY Magazine) – It would be nice, wouldn't it, if creating a secure financial life for you and your family was a one-time move. But in real life, the wherewithal to build a future tends to arrive in dribs and drabs--the $8,000 bonus, the $2,500 tax refund, that $6,000 in savings bonds you've been meaning to cash in. Even when you've been at it for a while, the bulk of your money decisions are more likely to involve those four-digit amounts than massive windfalls.

So where should you put five grand today? Well, you can't really answer that until you pose some other questions. For example, if you're just getting going (page 88), you may be eager to buy a killer stock, but you first need to ask whether you've got enough cash to see you through an emergency or whether your money might be put to better use paying off credit-card debt. Once you're on your way (page 90), where to invest the next $5,000 depends a lot on where you put the last $5,000. And by the time you're a seasoned vet (page 92), the question comes down to how much pizazz you want to add--or what risks you want to defend against.

In the article that follows, find the pages that reflect where you are in life and read the questions. The answers will guide you to the investment or action that's the best choice for that $5,000 or so you're itching to put to work. Ready? Then get to it.

Starting Smart

You have five grand in the bank, plenty of possibilities, and you're eager to make that initial investment a killer. But first you've got to build the right foundation.

A few years into your working life, you probably have lots of ideas about where to put $5,000: a plasma TV, a blowout weekend in Vegas, a new wardrobe. But you also have an inkling that it's time to get serious about money. Start by asking yourself these questions.

1 Do you have a cash cushion? You should have at least three months' worth of living expenses saved. If not, stop here: Use your $5,000 to build a rainy-day fund. You don't want to be one visit to the auto shop away from racking up thousands in credit-card debt. See "Stash Cash" at right.

2 Do you have credit-card debt? Each year a card balance lingers, the Mexico vacation you charged right after graduation becomes more costly. Chances are, your memories aren't growing fonder at double-digit rates. So pay off that balance. It's the equivalent of earning 13% (on average) risk-free. See "Erase Debt" at right.

3 Do you own a home? As long as you are paying for housing, you might as well spend on a house you own. Even if prices cool, a home has advantages like no other asset, including no taxes on the first $500,000 in gains (for a couple). And because mortgage interest is tax deductible, the cost may be lower than you think. See "Save for a House" at right.

4 Are you doing what it takes to retire rich? It's not chasing a hot stock. It's getting into the habit of saving regularly. The easiest way to do that is to sign up for a 401(k) plan. The money comes out of your paycheck (pretax) and grows tax-free. Better yet, your boss will likely match your contribution. (Having a hard time finding the money to invest? Invest in your earning power; see "Grad School" at right.) Once you're saving, go for stocks. At your age, you can take sensible risks to get higher returns. See "Build Wealth" below.

• Stash Cash

BEST $5K CHOICE: HSBCDirect money- market account

The best place for your emergency fund is a bank account that's totally safe. In April, HSBC was paying 4.8% on its insured money-market account (888-404-4050; hsbcdirect.com).

4.8% Rate on HSBC's money-market account

• Erase Debt

BEST USE OF $5K: Pay off your high-rate cards first

Pull out your credit-card bills to see what rate you're paying on each. Then put as much as you can toward the highest-rate balance. The psychic payoff too is double digit.

13% Return for paying off typical card

• Build Wealth BEST $5K CHOICE: A low-cost, widely diversified fund

The best long-range investments for beginners are mutual funds that come with no sales commissions and low annual fees (so that more of your money goes to work) and that spread your stash over a wide swath of the stock market--and maybe the bond market too (because diversification equals safety). Below are three such funds.

REMEMBER With investing, consistency is the key. High-quality stocks may provide an average return of about 10% a year, but only if you buy at reasonable prices. If you put all your money in the market when it's at a peak, you'll end up with below-average returns even if you hold on for decades. You can minimize that danger by investing a set amount of money regularly, what's called dollar-cost averaging.

NOTES: As of April 3. N.A.: Not applicable. [1]Annualized. [2]Returns vary by retirement date. [3]Lower minimums available for some IRAs and regular electronic investments. SOURCES: Morningstar, the funds.

•Save for a House If you plan to buy within five years, you can't risk losses. Your down payment belongs in an ultrasafe money fund. With more time, you can invest in a stock fund. Start shifting into cash when house hunting is five years away.

BEST $5K CHOICE (if you're buying within five years): Vanguard Prime Money Market Fund 800-851-4999

No Risk 4.5% yield

BEST $5K CHOICE (if you're buying later): Fidelity Balanced (See the table at left.) This balanced fund has 67% of assets in stocks now.

10% five-year annualized return

• OUT OF THE BOX

Grad School

Anything you do to increase your salary early in your career can keep paying dividends as long as you work. Take a class, pick up a certification, improve your computer skills. Earning a master's degree will bump up your pay by 19%. If you're willing to attend a state, lesser-known or online school, you can bring home an M.B.A. for about $5,000 a year.

TOUGH CALL

Pay Off Student Loans or Invest? Should you prepay or put money in stocks?

WHY PAY OFF THE LOAN

• If you have a private loan, chances are you have a variable rate of at least 7.5%--and rising. Paying down that balance keeps rate increases in check.

• You want happy memories of your college days, not debt.

WHY INVEST

• Long term, you should be able to earn a better return than the rate you're paying on a federal loan, especially if you're getting a tax break in your 401(k) or IRA. If you've consolidated those loans, you likely have a fixed rate of no more than 4.75%.

• Up to $2,500 in student-loan interest is deductible (if you're single with an income of $50,000 or less, or $105,000 if you're married and filing jointly). All the more reason not to pay it all off early.

BOTTOM LINE

1 If your interest is 7% or higher, pay off the debt. You can't count on doing better in the market.

2 Otherwise, invest in stocks. If you absolutely can't stand the idea of debt--or have a huge loan balance--put half your $5,000 toward debt and invest the rest.

Going for Growth

Once you've been investing for a few years, your next five grand can fill any gaps in your portfolio--that is, if other responsibilities don't have dibs on the money

You've picked up a lot over the past decade: a house, kids, a good job and, chances are, a few mutual funds. At this stage, life sets some of your priorities, but you have flexibility on others. Assuming that you've already got an emergency fund and your credit-card balance is under control (if not, see page 88), ask yourself:

1 Do you have a will? You could live another half-century. Or not. If you have a family, there's no excuse for you not to have a will and the other essentials of a basic estate plan, including guardians for young children. If you don't, skip directly to "Put Family First" at right. Steer your $5,000 there--and you'll have change left over.

2 Are you saving for your kids' education? You can never start socking it away soon enough for this six-figure monster, and you can use all the help you can get. The best form of help is the tax-advantaged savings plan known as a 529. Assuming that you've got a will and you're maxing out on your 401(k)--and you are, aren't you?--then a 529, in-state or out, gets your five grand. See "Save for College" on page 91.

3 Are you dying to remodel? Face it: Renovating is more of an expenditure than an investment, since few home makeovers recoup their costs. Still, some projects repay better than others, and one can actually be done for only a little over $5,000--adding a deck. See "Romance the Home" at right.

4 Do you have more than $10,000 in funds? If so, and none of the other goals on this page take precedence, you're ready to use your next $5,000 to start building a diversified mix of funds. A portfolio is the basis of any long-term strategy and the best way to keep your money growing while minimizing risks. See "Build Wealth" below.

• Put Family First

BEST USE OF $5K: Get a will--now

The more you have at stake, the more you need to protect your family with a will and two other key legal documents: a durable power of attorney (for managing money if you're incapacitated) and forms that let someone handle crucial medical decisions. A lawyer can prepare all three for $1,000 or less.

• Romance the Home

BEST USE OF $5K: Add a deck

$6,917 Average cost: 16-foot-by-20-foot deck

Kitchen and bath remodels tend to have the highest payback ratio, but decks come close. A typical deck might return 87% of its costs when you resell. And it's one home project you can do for a small sum.

• Build Wealth

BEST USE OF $5K: Create a diversified fund portfolio

Once you graduate from one fund to a handful, it can be tough to figure out where to apply a fresh $5,000. Add to the funds you already have? Buy a new one? The solution is to follow this simple three-step plan.

1 FIND A MIX First settle on a target allocation. You want stocks to drive your returns and bonds to add stability. You can use the portfolio at right. Most families that are more than 10 years from retiring can keep 80% in stocks and 20% in bonds. Or make your own blend with the asset allocator at troweprice.com (you must register at the site).

2 FIT IN YOUR FUNDS Next look at how the funds you already own match up with your desired mix. One cool tool for doing that: the Instant X-Ray at morningstar.com. You plug in your funds' tickers and the X-Ray calculates your asset mix, making it easy to see, say, that you need to add small-cap stocks with your next $5,000.

3 FILL THE GAPS The five funds here are excellent portfolio building blocks. All are in the MONEY 65, our recommended list of funds, and all will let you invest for $3,000 or less. Remember: For each of these funds you could substitute a Vanguard index fund from the same category at lower cost. For Vanguard's lineup, call 800-851-4999.

NOTES: As of April 3. [1] Annualized. SOURCE: Morningstar.

TOUGH CALL

Prepay the Mortgage or Invest? Who wants to feel beholden to a bank for decades? Why not put $5,000 toward your mortgage and be debt-free faster?

WHY PREPAY

• You'll pay less interest over the life of the loan, cutting the total cost of your house. Paying an extra $5,000 in year five of a $200,000 30-year loan with a fixed rate of 6.5% saves you $19,700.

• If you lose your job or retire, you'll be happy to have one fewer monthly bill.

WHY INVEST

• Today the rate on a 30-year fixed-rate mortgage is still a low 6.5%, and in effect that's what you earn by prepaying. That's good, but far less than the historic 10% average annual return for stocks.

• But wait. Because you can write off mortgage interest, the money you borrow is even cheaper. If you're in the 25% tax bracket and you itemize, your effective interest rate is 4.9%.

BOTTOM LINE Stocks win. Odds are that your investment returns will outpace your cost of borrowing. The best argument for prepaying your mortgage is psychological: Perhaps you will sleep better at night knowing you have one fewer bill to pay each month.

• Save for College BEST $5K CHOICE: Your state's 529 plan (if your state offers a tax break and low-cost plan)ALTERNATIVE: Michigan's or Utah's 529

With a state 529 college savings plan, your savings grow tax deferred; withdrawals for educational costs are federally tax-free too, at least until 2010. If proposed legislation extending 529s' tax status is not passed, earnings withdrawn after that will be taxed at your child's rate. But the potential tax savings are worth the risk. Not every state's plan deserves your money, though. Use your local plan if you can deduct the savings on your state tax return; the plan is no-load; and annual expenses are less than 1%. If not, choose the low-cost 529 from either Utah or Michigan.

Utah Educational Savings Plan (800-418-2551) Michigan Education Savings Program (877-861-6377)

• OUT OF THE BOX Fund a Roth Once you're saving enough in your 401(k) to get the company match, sign up for a Roth IRA. You can put in as much as $4,000 a year. You'll pay tax on the money you save in a Roth, but what you withdraw is tax-free, a major plus if your tax rate is higher later.

Adding Pizazz

Now that you're a seasoned saver, you have a rich menu of investment options to consider. Crucially, that next $5,000 can make your portfolio safer in your pre-retirement years.

You've created a diversified portfolio and built up your retirement accounts. Now, with a fresh $5,000, you have the flexibility to do all sorts of fine-tuning. Ask yourself these questions:

1 Are you over 50? As you get within a decade of retirement and your priorities shift from building your wealth to making it last, income investments become more important. They lower your risk and can be a steady source of cash later. Bonds are the obvious way to add income. But you can get about as much income today, especially after taxes, by buying high-dividend stocks. See "Income, No Bonds" at right.

2 Are you in the 25% tax bracket or higher? Bonds boost your income and lower your risk, but you have to pay a full load of taxes on them. You may do better in municipals. See "Income, No Taxes" at right.

3 Are you willing to devote more time to your investments? Lots of investors reach their goals using funds alone, but buying individual blue-chip stocks can cost you less in fees and taxes. Just make sure you have the time and inclination to research and track them, as well as the fortitude to ride out short-term losses. For the names of eight stocks that look especially timely now, see "Build Wealth" below.

4 Do you worry about oil prices, inflation or recession? With less time before you tap your savings, it's tougher to recover from a big loss. A diversified portfolio should protect you against a sudden shock. But adding certain stocks or funds can fortify you even more against specific threats. See "Disaster Defense" at right.

5 Do you plan to leave money to your kids As long as you don't need another $5,000, consider giving money to the kids now so you can have the pleasure of watching it be put to work. Or play. See "Out of the Box" at right.

• Income, No Taxes BEST $5K CHOICE: T. Rowe Price Tax-Free Income (PRTAX)

T. Rowe Price Tax-Free Income (800-638-5660), which invests in high-quality municipal bonds, now yields 4.4%. That works out to 5.9% if you're in the 25% tax bracket.

5.9% tax-equivalent yield

• Income, No Bonds BEST $5K CHOICE: iShares Dow Jones Select Dividend Index (DVY)

This ETF is a low-cost way to own a wide variety of high-yield stocks, financial services and utilities in particular. The recent yield is 3.1%. Big plus: Dividends are taxed at a lower rate (15%) than bond income, and stocks' growth potential is better than with bonds.

• Build Wealth BEST $5K CHOICE: Blue-chip growth stocks

Adding stocks to your portfolio can help you place targeted bets. If you think military spending can only go up, for instance, you can emphasize the sector by buying General Dynamics. These eight stocks represent a variety of industries and all look especially timely. They're ranked by dividend yield; the higher the yield, the safer the stock is likely to be.

MORE PICKS For additional shares that have a total return potential of more than 11% a year, based on their dividends and projected earnings growth, look at the Sivy 70 list of blue-chip growth stocks on page 84.

NOTES: As of March 24. P/E ratios are based on estimated earnings for the current year. SOURCE: Thomson/Baseline.

• OUT OF THE BOX Give It Away

You can pass on $11,000 a year to anyone ($22,000 if you're married) without incurring a gift tax. If you give your children money now, you get to see them enjoy it.

• Disaster Defense

If you've been reading about economic threats and worry that you're unprepared, you can add extra protection for three specific risks.

Inflation BEST $5K CHOICE: T. Rowe Price New Era (PRNEX)

Consumer prices have risen 3.6% over the past year, and many analysts think they are headed a lot higher. Even 4% inflation makes it harder to save enough for retirement. You can offset that risk by buying New Era (800-638-5660), which owns natural resources and energy stocks.

Oil Shocks BEST $5K CHOICE: Anadarko Petroleum (APC)

Demand for oil is soaring in China and India. That alone could mean much higher energy prices, which could depress the economy. You can hedge by buying Anadarko. One advantage is that 85% of its reserves are in North America, which means that, unlike companies with wells in the Middle East, it can't be hurt badly by foreign unrest.

Recession BEST $5K CHOICE: Vanguard Long-Term Treasury Investor (VUSTX)

The first thing new Federal Reserve chairman Ben Bernanke did was hike rates to forestall inflation. Trouble is, if he raises interest rates too much, he could tip the economy into recession. If you worry you can't ride out such slumps, put part of your money in a long-term bond fund like Vanguard Long-Term Treasury Investor (800-851-4999). Its value will rise when rates fall during a slowdown.

TOUGH CALL

Buy a Vacation Home or Stocks?

Second-home prices have been on the leading edge of the real estate boom. Should you buy in now?

WHY REAL ESTATE

• It's easy to get your kids to visit if your house is on the beach.

• You can deduct mortgage interest and property taxes, just as with your first home.

• There's an indescribable satisfaction to owning, not just visiting.

WHY STOCKS

• If you pay cash for the home, you'll be left with a smaller pool to live off of. Borrowing adds to your expenses.

• Though beachfront prices have zoomed, you can't bank on more of the same. You're kidding yourself if you think this is just another retirement investment. "There could be 10 years of no appreciation," says financial planner Richard Schultz.

• It's easier to draw income from stocks.

BOTTOM LINE If you have to ask yourself whether you can afford the house, don't buy it. If you can measure the time that you will spend there every year in weeks, not months, stick to stocks and make your getaway a rental, not a purchase.