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Updated on Wednesday, December 30, 2020
Think you need thousands of dollars to start investing? Think again. When it comes to investing, no amount is too small, and today’s modest investments can pay off big time down the line.
If you have an extra $500, you may not think it’s worth it — or think that it’s not even possible — to invest such a small sum. While that amount isn’t a windfall, there are a variety of solid investment options for that kind of cash. Here are four of the best ways to invest $500.
How to invest $500: 4 options to consider
1. Open a robo-advisor account
A robo-advisor is a great option if you’re just getting into the investing game. These automated online investment platforms allow you to plug in some information and create a portfolio based on factors such as how much risk you’re willing to take. Because your account isn’t actively managed, the fees associated with robo-advisors typically are lower than those for accounts with human advisors. You’ll also find that they typically have low or no minimum account requirements.
For example, Betterment requires no minimum deposit to start investing, and there’s a 0.25% management fee for a basic digital account. Wealthfront is another popular robo-advisor that has a $500 account minimum and charges a 0.25% annual advisory fee on your investments.
Once you have a robo-advisor account, you can select from a variety of investment options, including taxable brokerage accounts, trusts, solo 401(k)s and individual retirement accounts (IRAs).
For beginning investors, a Roth IRA could be a good place to start. These retirement savings plans allow you to save after-tax money that can grow tax-free until you need it in retirement. It’s a great option if you’re in a lower tax bracket today than you expect to be in when you retire, which often is the case for beginning investors. Note that there are penalties if you withdraw the funds before age 59 ½ and before the account is five years old; however, there are exceptions if you use the funds for costs such as a first-time home purchase or qualified education expenses.
2. Go micro
Micro-investing is a good option to consider if you want to keep building on your initial $500 investment. Micro-investing apps can collect your “spare change” and invest it automatically for you. For example, if you spend $21.25 at the grocery store, 75 cents will automatically be invested through your account. Those small amounts can add up over time, and before you know it, you may have socked away another $500 in your account.
The fees for micro-investing accounts are typically low, while the account minimums are also typically low or even nonexistent. Acorns is an example of a micro-investing app that has no account minimum, though you will need at least $5 to start investing. Fees range from $1 to $3 per month.
3. Open a high-interest savings account
If you want to keep your money liquid and see it grow, but also want to keep your risk low, you may want to consider opening a high-interest savings account. The average interest rate hovers at just around 0.05% currently. While that’s no match for the stock market’s average rate of return — roughly 10% annually since 1926 — it’s better than nothing, and there’s little risk involved.
A high-interest savings account also can serve as an emergency fund if you don’t already have one. Most experts recommend having an emergency fund that equals three to six months’ worth of your living expenses, so that if you lose your job or get hit with other unexpected expenses, you don’t have to take on debt.
In addition, while the potential stock market payoff is impressive, it’s a long-term game for the most part. If you want to be able to withdraw money as needed, a high-interest savings account could be a good alternative to consider.
4. Pay off debt
It might not be the type of investment you’re thinking of, but if you have debt — particularly non-mortgage debt with a high interest rate — paying it off can be a wise investment in your financial security.
For instance, if you have a credit card with an 18% interest rate and you pay it off, you essentially “earn” a lot more than you would with any of the other options mentioned above. With that debt gone, you could save yourself from several years’ worth of future interest payments. Once you’ve paid off your high-interest debt, the next $500 (which you can save from the funds you would have sent in as monthly payments) can be funneled into more traditional investment options.
Steps to take when investing $500
When it comes to actually investing $500, you should take the following steps to ensure you make the best decisions for your unique financial situation:
1. Determine your financial priorities
Now that we’ve outlined a number of different ways you can invest an extra $500, you’ll need to determine which option is best for you — and that starts with recognizing your financial priorities. In general, it’s advisable to prioritize the following financial tasks, and that extra $500 can help you do it:
- Establish a liquid, emergency savings fund with up to three to six months’ worth of living expenses.
- Contribute to a tax-efficient retirement account, such as a 401(k) or IRA. Aim to contribute 10% to 15% of your pretax income (including contributions from your employer).
- Pay off high-interest debt, such as credit card debt or personal loan debt.
2. Pick the right account
The next step to investing $500 is selecting the right account. If you determine that your financial priority should be building an emergency fund and you’re in the market for a high-yield savings account, compare your options and hunt for the best interest rate.
Meanwhile, if you find that your $500 is best spent paying off high-interest debt, you might consider consolidating that debt to take advantage of a lower interest rate. If you decide that all of your other financial priorities are taken care of, and you want to invest that $500 in the market, compare different robo-advisors and brokers, looking carefully at their fees, investment selection and accessibility.
3. Don’t touch it
The key to investing your $500 wisely is to not touch it after you invest it — whether you put it in a high-yield savings account or a taxable brokerage account. Your $500 can eventually turn into a lot more through the magic of compounding interest or compounding gains, but you’ll need to stash it in the right spot and give it time to grow.
The sooner you make investing a habit, the more potential you have to reach your financial goals — and no amount is too small to start with. Rather than stashing away $500 in your sock drawer, take advantage of the variety of options that exist to start growing your money now.
Fees or rates mentioned in this article are accurate as of the date of publishing.