How to invest $500
If investing feels like a rich person鈥檚 game, it鈥檚 not your imagination: Many online brokers impose initial deposit requirements of $1,000 or more. Mutual funds, a common investment choice with聽, often have similar minimums.
But that doesn鈥檛 mean you should sit on your hands 鈥� or settle for聽the near-0% interest rates that savings accounts are paying 鈥� and assume you can鈥檛 meet the cost of entry. After all, regularly investing small amounts over a long time horizon just might be the single best way to build wealth. And with robo-advisors like聽听补苍诲听聽actively targeting new investors with low minimums, it鈥檚 possible for anyone to get in on the action.
Here鈥檚 how to do that with just $500.
Start with a 401(k) if you have one
If you have some extra money to invest and a 401(k) that offers matching dollars, this is an easy answer: Start funding that baby. Those matching dollars are free money and a 100% return on your investment. Don鈥檛 pass that up.
There鈥檚 another benefit, too: 401(k)s typically offer a curated selection of investments with no minimum requirements. The selection tends to be skimpy, yes, but there are likely to be at least a few good mutual or index fund choices that would otherwise be out of your reach. For instance, Vanguard鈥檚 target date funds 鈥� which are some of the best, and lowest-cost, in the business 鈥� typically require聽a $1,000 minimum investment. But if they鈥檙e offered within your 401(k), that won鈥檛 apply.
The payoff:聽$500 invested at a 7% return for 30 years will grow to close to $4,000. Add a 50% match on that contribution and you鈥檒l have nearly $6,000. No, it鈥檚 not a ton of cash. But it is 10 times your initial investment 鈥� and regularly putting extra money to work will add up over time, in addition to making you a more confident investor.
Invest through a robo-advisor
When you have聽a small amount to invest, one of the best choices is a robo-advisor.
聽use computer algorithms to manage your money in exchange for a small management fee. The process diversifies even small account balances among a range of carefully selected聽, and the management fee is typically a percentage of assets under management, which means the amount you pay is tied to your account balance.
Betterment has a $0 funding requirement, but on balances of $10,000 or less it requires auto-deposits of $100 a month to avoid a $3 monthly charge. Wealthfront has a $500 minimum but manages the first $10,000 for free. (Even better: The company has agreed to increase this to聽.)
With either of these robo-advisors you can聽, which is the best home for your money 鈥� after, of course, a 401(k) with matching dollars.
The payoff:聽Betterment says its clients can expect returns that are 4.3% higher than what the聽average DIY investor sees. Less the company鈥檚 fees, on $500 invested over 30 years that could add up to additional earnings of close to $8,600.
Pick an online broker that waives its minimum
If a robo-advisor isn鈥檛 your style 鈥� maybe you want to be a little more hands-on with your investment choices 鈥� you might prefer the autonomy of an聽.
The trouble: As noted, many online brokers require $1,000 or more to open an account. Even if a broker doesn鈥檛 require that kind of initial balance, many mutual funds and index funds do.
But there鈥檚 another option that builds momentum and gets you in the door: Some brokers will waive the required minimum to open an account if you commit to continued monthly deposits. (This is often called an automatic investing program.) At Fidelity, you can do this in an IRA if you elect for auto-investments of at least $200 a month. Charles Schwab often waives its $1,000 account minimum with automatic investments of $100 a month.
The catch if you go this route is that your investment choices may be limited to select mutual funds, typically the broker鈥檚 own. But there鈥檚 also an added perk: Once you get into the habit of putting that money away, you may not want to stop. The act of saving admittedly isn鈥檛 very fun, but watching that money build up certainly can be.
The payoff:聽An earlier start聽on growing聽your money.聽Let鈥檚 say it would have taken you a year to build up a $1,000 minimum. Delaying your investment by that long would聽shave $300 off your 30-year return.
Invest in commission-free ETFs
It鈥檚 tough to get enough diversification if you buy individual stocks with a small amount of money, and you risk losing a good chunk聽of your investment to commissions. Enter ETFs.
ETFs are index funds, meaning they track an index, like the S&P 500. When you buy one, you鈥檙e buying a basket of investments. A good total stock market ETF, for example, will hold stocks of companies both large and small in a variety of different sectors.
The major difference between ETFs and index funds is that ETFs trade 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 鈥� but many brokers offer a list of commission-free ETFs. The trick is to find a broker with a minimum you can meet聽补苍诲听a good selection of commission-free funds.聽听补苍诲听聽are both worth checking out.
The payoff:聽Eliminate a $10 commission on a $500 investment and you鈥檒l avoid losing 2% of that investment right off the bat. Two percent may not sound like much, but it鈥檚 nearly a third of the overall return you can expect per year.
Pay down high-interest rate debt
Think this isn鈥檛 an investment? Think again. Paying off high-interest-rate debt like credit cards offers a risk-free and guaranteed return on your investment that is equal to the debt鈥檚 interest rate.
The payoff:聽Wiping out a balance of $500 on a 14% interest rate card is worth $70. You鈥檙e unlikely to get that kind of return in the stock market 鈥� and you can鈥檛 put a price on the euphoria that comes with being debt-free.
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