If investing feels like a rich person’s game, it’s not your
imagination: Many investments cater to the wealthy. But there are plenty of
ways to invest with a smaller amount like $500.
After all, regularly investing those small chunks over a
long time horizon just might be the single best path to building wealth —
especially if you have high-interest credit card debt paid off and you’re
contributing enough to earn any available 401(k) match from your employer.
With brokers and robo-advisors requiring low minimums, it’s
possible for anyone to get in on the action. Here are five points to consider
when investing $500.
1. Select an investment account
If you’re not already saving for retirement — or you are,
but not enough — the best place for this money is an individual retirement
account.
IRAs are specifically designated for retirement, which means
you get tax perks for contributing. There are two main kinds: A traditional IRA
gives you an upfront tax deduction, but you’ll pay taxes when you take
distributions in retirement. With a Roth IRA, you earn no tax benefit today,
but you can pull out money in retirement tax-free. Both accounts have rules
around contributions and distributions.
You can open an IRA at any online broker or robo-advisor.
The process takes less than 15 minutes and can typically be done completely
online.
If you’re on track for retirement or this money is earmarked
for a different long-term goal, you can open a taxable brokerage account
instead. This is an all-purpose account with no special tax breaks, which means
the money can be used for any reason and there are no rules around how much you
can contribute and when you can take withdrawals.
2. Choose hands-on or hands-off investing
Did you go to Google for investing advice because you think
$500 isn’t enough money to get professional help? Not so. If what you really
want is someone to invest this money for you, you should know about
robo-advisors.
Robo-advisors will build an investment portfolio for you,
based on information you share like your goals and risk tolerance. They’re one
of the best ways to invest a small amount of money. You’ll pay a small
management fee for the service, but that fee is typically a percentage of
assets under management, which means the amount you pay is tied to your account
balance.
If you’d rather learn how to invest this money so you can
DIY going forward, read on for the best strategies.
3. DIY investor? Use commission-free ETFs
If you’d rather use this money to learn how to invest so you
can do it yourself going forward, that’s a sound strategy, too. However, it’s
tough to buy enough individual stocks with $500 to adequately diversify that
money. Diversification is important because it spreads your investment around —
when one investment goes down, another might go up, balancing things out.
Enter exchange-traded funds. ETFs are a kind of mutual fund,
meaning they allow you to purchase a number of different investments in a
single transaction. In the case of ETFs, the investments within the fund are designed
to track an index, like the Standard & Poor’s 500. When you buy an S&P
500 ETF, it should closely mirror the performance of the S&P 500. Many
brokers, especially those geared toward new investors or retirement investors,
offer a list of commission-free ETFs that can be traded at no cost.
ETFs are a particularly good choice if you have a small
amount of money to invest: They trade through an exchange like a stock; as
such, they are purchased for a share price. You could get a few ETFs and be
fairly well diversified for $500. Future investments could boost that
diversification further. The caveat here? Because ETFs are traded like a stock,
they can be subject to broker stock trading commissions, which can quickly eat
into the amount you have available to invest.
4. Keep cash invested for five years or more
Money you need for a financial goal in the next five years
shouldn’t be invested at all, as you don’t have time to ride out the waves of
the market. Money for a long-term goal like retirement should be invested. Time
allows your money to grow and bounce back from short-term market fluctuations.
The potential payoff: $500 invested at a 7 percent return
for 30 years will grow to close to $4,000.
No, it’s not a ton of cash, but it is eight times your
initial investment. Even better would be to use this windfall to kickstart an
investment-savings habit by opening an account and auto-contributing $100 more
per month. For example, open a Roth IRA with $500 and contribute $100 a month,
and after 30 years and with a 7 percent rate of return, that cash will grow to
$122,000.
5. Need the cash sooner? Consider these
With any investment, the more time it has to grow, the
better. But life often gets in the way. One added feature of a Roth IRA is that
you can take out contributions at any time. (This differs from the rules about
earnings, which you have to wait at least five years to withdraw from a Roth
IRA. And with traditional IRAs, you have to pay taxes plus a 10 percent penalty
for most withdrawals before the age of 59½.)
If you want to hold on to the cash for a rainy day by
feeding your emergency fund, that’s okay, too. But there are some alternatives
better than putting it in a mattress or tucked in a big-bank savings account:
high-yield online savings accounts, money market accounts, short-term bonds and
peer-to-peer lending may earn better rates.
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