November 29, 2016
The value of money is relative: One person’s windfall is someone else’s couch change. But with the typical American couple’s retirement savings clocking in at just $5,000, it’s safe to say that $1,000 falls squarely in the “windfall” camp for many people.
When money lands in your lap, no matter what the amount, you want to do right by it. But figuring out how to invest is, like many things, harder with fewer dollars. Fees eat more of the pie. Investment options are fewer because of minimum requirements. Diversification is harder to achieve.
All of those things are obstacles, but they aren’t insurmountable. Here are five of the best options for how to invest $1,000.
1. Double your money with a 401(k)
You read that right: If your 401(k) offers matching dollars, that $1,000 could very quickly turn into $2,000.
How? Depending on your plan, when you put money into your 401(k) — which happens as a salary deferral, before taxes — your company may put money in, too. How much money depends on the matching percentage, but it’s common for companies to match half or all of your contributions, up to 3% to 6% of your salary.
If you, like everyone else, enjoy free money, this is your first stop on the investing train. Most 401(k) plans don’t accept lump-sum contributions, so your $1,000 figures in this way: With your paycheck a bit smaller because of a 401(k) deduction, you can use the $1,000 as a cushion if you come up short on your monthly bills or you can repay yourself the difference each pay period.
2. Open an IRA
An individual retirement account is like a 401(k) you open on your own. Since you’re flying solo, there’s no match, but you still get a host of tax benefits, including the choice of tax-deferred or tax-free investment growth. (Here’s a full rundown of these accounts, including the difference between traditional and Roth IRAs.)
Another perk of an IRA is that it’s easier to find one of these with no — or at least a low — minimum deposit requirement. Many standard brokerage accounts require deposits too rich for your blood, but most of the brokers on our list of best IRA providers will gladly work with your $1,000.
3. Buy commission-free exchange-traded funds
Getting in the door of that IRA is only half the battle. Now you’ll likely face a slew of investment choices that are, sadly, out of your reach. Many mutual funds and index funds require minimum investments of more than $1,000.
But don’t resign yourself to an IRA full of uninvested cash. ETFs are a kind of index fund, but they have features that make them a good choice for small-dollar investors. While all funds charge an expense ratio — a percentage of your investment that goes toward the fund’s operating expenses — ETFs are on the low end of the cost spectrum. They also trade on an exchange like a stock, which means the minimum investment is a share price. That share price could be as little $5 or $10.
The benefit of that, beyond the fact that it’s a minimum you can meet, is that with $1,000 you can put together a few ETFs, which are necessary for a diversified portfolio. Just note the words “commission-free”: Because these funds are traded, you pay a commission to buy and sell. Buy five funds at a $10 commission, and you’ve already lost 5% of your investment to fees. Pick a broker with commission-free ETFs, and you’ll avoid that cost.
4. Use a robo-advisor
If the idea of picking ETFs bores you, terrifies you or both, you’ll probably like these services. Robo-advisors are robot-powered — or, less fun and sci-fi-sounding but more accurate, computer-powered — investment advisors. They buy fractional shares, which means you could own 10 or 12 ETFs with $1,000, and manage your portfolio as needed. Better still, many of them are geared toward small account balances, with no minimum.
In fact, a low balance works for you at Wealthfront, which manages free of charge the first $10,000 you invest. After that, the service costs 0.25%, about standard for the industry. One advisor, WiseBanyan, is free and has no account minimum. You’ll also pay the fund expense ratios, but robo-advisors typically use low-cost funds.
» MORE: The best robo-advisors
5. Trade for free with an investing app
Again, costs can make or break a small balance, so if you’re keen to trade stocks, here are three tips that, admittedly, border on nags:
- Investing for retirement should come first, and low-cost index funds and ETFs are the best way to do that.
- Research into the companies behind the stocks can be the difference between trading stocks and throwing your money away.
- Because online broker trade commissions can cost $5 to $10 a pop, you might want to do your trading via a free investing app.
There are two main options: Robinhood, which gives you access to a large selection of stocks and U.S.-listed ETFs, and Loyal3, which offers a slimmed-down list of 70 or so blue-chip stocks. Both allow you to trade commission-free and have no account minimum.
This post was originally published on March 11, 2016.