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How to Invest Your $500 Tax Refund


If investing feels like a rich person’s game, it’s not your imagination: many online brokers and mutual funds impose initial deposit requirements of $1,000 or more.

But that doesn’t mean you should sit on your hands, or settle for the near-0% interest rates that savings accounts are paying.

After all, regularly investing small amounts over a long period might be the single best way to build wealth. And with robo-advisors like Betterment and Wealthfront requiring low minimums, it’s possible for anyone to get in on the action for as little as $500.

Invest through a robo-advisor

When you have a small amount to invest, one of the best choices is a robo-advisor. They use computer algorithms to manage your money in exchange for a small management fee – typically a percentage of your assets.

Betterment has a $0 funding requirement and charges a 0.25% management fee. Wealthfront has a $500 minimum but manages the first $10,000 for free. (Even better: The company has agreed to increase this to $15,000 for NerdWallet’s readers.)

The payoff: Betterment says its clients can expect returns that are 4.3% higher than what the average DIY investor sees. Minus the company’s fees, on $500 invested over 30 years that could add up to additional earnings of nearly $6,000.

Wealthfront 5.0-stars
  • Offers superior tax efficiency on accounts over $100,000. See our Wealthfront review.
  • Management fee: 0.25%, waived on first $10,000 in account
  • Account minimum: $500
  • Promotion: NerdWallet readers get the first $15,000 managed for free
Betterment 5.0-stars
  • Goal-based tools motivate investors to save more. See our Betterment review.
  • Management fee: 0.25%
  • Account minimum: $0
  • Promotion: One month free management with $10,000 deposit

Pick an online broker that waives its minimum

If you want to be more hands-on with your investments— you might prefer an online brokerage account. Both Merrill Edge and E-trade are great options for small investments as they boast $0 and $500 account minimums respectively.

The majority of online brokers, however, require $1,000 minimum or more to open an account. That being said, some brokers will waive the minimum if you commit to regular monthly deposits (often called an automatic investing program.) At Fidelity, you can do this in an IRA if you auto-investment at least $200 a month. Charles Schwab often waives its $1,000 account minimum with automatic investments of $100 a month. The downside of this route is that your investment choices may be limited.

The payoff: An earlier start on growing your money. Let’s say it would have taken you a year to build up a $1,000 minimum. Delaying your investment by that long would shave $300 off your 30-year return.

merrill edge logo 4.5-stars
  • A breadth of research from well-respected providers alongside its own offerings. See our Merrill Edge review.
  • Commission: $6.95 per trade
  • Account minimum: $0
  • Promotion: Cash bonuses ranging from $100 for deposits of $20,000 to $49,999, to $600 for deposits of $200,000 or more
optionshouselogo 5.0-stars
  • Provides low commissions and superior trading tools, particularly for options traders. See our OptionsHouse review.
  • Commission: $4.95 per trade
  • Account minimum: $0
  • Promotion: Trade free for 60 days with balance of $5,000 or more

Invest in commission-free ETFs

It’s tough to get enough diversification if you buy individual stocks with a small amount of money, and you risk losing a good chunk 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’re 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.

The caveat here? Because ETFs are traded like a stock, they can be subject to broker stock trading commissions — but many brokers offer a list of commission-free ETFs. TD Ameritrade and E-Trade both offer a variety of commission-free ETFs.

The payoff: Eliminate a $10 commission on a $500 investment and you’ll avoid losing 2% of that investment right off the bat. Two percent may not sound like much, but it’s nearly a third of the overall return you can expect per year.

td-ameritrade 5.0-stars
  • Provides top-tier research and two powerful trading platforms available to all customers. See our TD Ameritrade review.
  • Commission: $9.99 per trade
  • Account minimum: $0
  • Promotion: Up to $600 cash bonus
Etrade 4.5-stars
  • Offers a large investment selection with reasonable commissions and fees. See our E-Trade review.
  • Commission: $9.99 per trade, volume discounts available
  • Account minimum: $500
  • Promotion: Up to $600 cash bonus

Start with a 401(k) if you have one

If you have 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’t pass that up.

The payoff: $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’ll have nearly $6,000. No, it’s not a ton of cash. But it is 10 times your initial investment — and regularly contributing will add up over time.

Pay down high-interest rate debt

Think this isn’t 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’s interest rate.

The payoff: Wiping out a balance of $500 on a 14% interest rate card is worth $70. You’re unlikely to get that kind of return in the stock market — and you can’t put a price on the euphoria that comes with being debt-free.

Image via iStock.