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Updated on Thursday, February 7, 2019
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 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
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 the fees for accounts with human advisors. You’ll typically also find that they 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 may be a good place to start. These retirement savings plans allow you to save after-tax money now 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. There are penalties if you withdraw the funds before age 59 and a half and before the account is five years old. However, there are exceptions if you use the funds for things 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. These 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 automatically will 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 typically are low, and the account minimums are low or nonexistent. For example, Acorns has no account minimum, but 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 over 2% currently. While that’s no match for the stock market’s average rate of return of roughly 10% annually since 1926, it’s better than nothing, and there’s little risk involved. It 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 loss or get hit with other unexpected expenses, you don’t have to take on debt. Also, 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.
The sooner you make investing a habit, the more potential you have to reach your financial goals. 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.