How to invest $ 500 for newbies in the stock market
If investing sounds like a rich man’s game, it’s not your imagination – many investments are for the rich. But there are many ways to invest with a lower amount like $ 500.
After all, regularly investing those little chunks over a long-term horizon might just be the best way to build wealth – especially if you have high interest credit card debt paid off and you’re contributing enough to earn the 401 (k) ( k) available. match your employer.
With brokers and robo-advisers demanding low minimums, it’s possible for anyone to get in on the action. Here are five things to consider when investing $ 500.
1. Select an investment account
If you aren’t already saving for retirement – or if you are, but not enough – the best place to get that money is in an individual retirement account.
IRAs are specifically designated for retirement, which means you get tax benefits by contributing. There are two main types: A traditional IRA gives you an initial tax deduction, but you will pay taxes when you take distributions in retirement. With a Roth IRA, you don’t earn any tax benefits today, but you can withdraw money in retirement tax-free. Both accounts have rules regarding contributions and distributions.
If you’re on the right track for retirement, or if this money is for a different long-term goal, you can open a taxable brokerage account instead. This is a multipurpose account with no special tax breaks meaning that the money can be used for any reason and there are no rules about how much you can contribute and how much. when you can make withdrawals.
2. Choose a practical investment or not
Have you gone to Google for investment advice because you think $ 500 is not enough for professional help? No. If you really want someone to invest that money for you, you need to know about robo-advisers.
Robo-advisers will build an investment portfolio for you, based on the information you share such as your goals and risk tolerance. This is one of the best ways to invest a small amount of money. You’ll pay a nominal management fee for the service, but this fee is usually 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 that money so you can DIY in the future, read on for the best strategies.
3. DIY investor? Use commission-free ETFs
If you prefer to use that money to learn how to invest so that you can do it yourself in the future, this is also a good strategy. However, it is difficult to buy enough individual stocks with $ 500 to adequately diversify that money. Diversification is important because it spreads your investment – when one investment goes down another can go up, balancing things out.
Get into exchange traded funds. ETFs are a kind of mutual fund, which means they allow you to buy a number of different investments in one transaction. In the case of ETFs, the investments within the fund are designed to track an index, such as 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, in especially those aimed at new investors or retirees, offer a list of commission-free ETFs that can be traded free of charge.
“ETFs are a particularly good choice if you have a smaller amount to invest.“
ETFs are a particularly good choice if you have a smaller amount to invest: they trade on an exchange like a stock; as such, they are purchased at the price of one share. You could get a few ETFs and be fairly well diversified for $ 500. Future investments could further stimulate this diversification. The caveat here? Since ETFs are traded like a stock, they can be subject to stock brokerage commissions, which can quickly eat into the amount you have available to invest.
4. Keep cash invested for 5 years or more
The money you need for a financial goal in the next five years should not be invested at all, because you do not have time to ride the waves of the market. Money for a long term goal like retirement needs to be invested. Time allows your money to grow and rebound in the face of short-term market fluctuations.
The potential payoff: $ 500 invested with a 7% return for 30 years will increase to almost $ 4,000.
“Use this windfall to jumpstart an investment savings habit by opening an account and automatically contributing an additional $ 100 per month.“
No, it’s not a ton of money, but it’s eight times your initial investment. Better yet, use this windfall to start an investment savings habit by opening an account and automatically contributing an additional $ 100 per month. For example, open a Roth IRA with $ 500 and contribute $ 100 per month, and after 30 years and with a rate of return of 7%, that money will increase to $ 122,000.
5. Need the money sooner? Consider these
Whatever the investment, the more time it has to develop, the better. But life is often an obstacle. An added feature of a Roth IRA is that you can withdraw contributions at any time. (This differs from the earnings rules, 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% penalty for most withdrawals before the withdrawal. age 59 and a half.)
If you want to save the money for a rainy day by fueling your emergency fund, that is also OK. But there are better alternatives than investing in a mattress or a big bank savings account: high-yield online savings accounts, money market accounts, short-term bonds, and peer-to-peer loans. can get better rates. (For more information, see this guide to best account for short term savings.)