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How to Invest $500

Start with your 401(k). After that, look into robo-advisors, where you can get guidance for just a small fee.
Financial Planning, Investing, Investing Strategy, Investments
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If investing feels like a rich person’s game, it’s not your imagination: There are plenty of investments that cater to the wealthy.

But that doesn’t mean you have to store your money in your sock drawer, or settle for the below-1% interest rates that most savings accounts are still paying. There are plenty of ways to invest smaller amounts like $500.

After all, regularly investing those small chunks over a long time horizon just might be the single best way to build wealth. And with brokers and robo-advisors requiring low minimums, it’s possible for anyone to get in on the action. Here’s how.

Put your money in the right place

Based on your savings and lifestyle, we'll help you understand where to invest your money — the accounts you need and how to use them — so you can get to where you want to be.

Decide: hands-on or hands-off?

Did you Google for investing advice because you think $500 isn’t enough money to get it elsewhere? Not so. If what you really want is someone to invest this money for you, you should know about robo-advisors.

Robo-advisors will build an investment portfolio for you, based on information you share like your goals and risk tolerance. They’re one of the best ways to invest a small amount of money. You’ll pay a small management fee for the service, but that fee is typically a percentage of assets under management, which means the amount you pay is tied to your account balance.

Here are our picks for the best robo-advisors — the two highest-rated have minimum investment requirements of $500 or less. If you’d rather learn how to invest this money so you can DIY going forward, read on for the best strategies.

Name your goal

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Whenever you invest, the goal for your money is key: Money you need in the short-term shouldn’t be invested at all, as you don’t have time to ride out the waves of the market. Best to keep that cash close, in a savings account or money market.

Money for a long-term goal like retirement should be invested — that time is what allows your money to grow, and if you experience short-term market fluctuations, you’ll quickly bounce back.

(Important caveat: Before you do anything with this money, make sure you’re earning any available 401(k) match — matching dollars are free money and a 100% return on your investment — and that you’ve paid down high-interest rate debt, like credit cards.)

Choose an investment account

If you’re not already saving for retirement — or you are, but not enough — the best place for this money is an individual retirement account.

IRAs are specifically designated for retirement, which means you get tax perks for contributing. There are two main kinds: A traditional IRA gives you an upfront tax deduction, but you’ll pay taxes when you take distributions in retirement. With a Roth IRA, you earn no tax benefit today, but you can pull out money in retirement tax-free. Both accounts have rules around contributions and distributions.

You can open an IRA at any online broker or robo-advisor. The process takes less than 15 minutes and can typically be done completely online.

If you’re on track for retirement or this money is earmarked for a different long-term goal, you can open a taxable brokerage account instead. This is an all-purpose account with no special tax breaks, which means the money can be used for any reason and there are no rules around how much you can contribute and when you can take withdrawals.

Invest in commission-free ETFs

With $500, it’s tough to buy enough individual stocks to adequately diversify that money. Diversification is important because it spreads your investment around — when one investment goes down, another might go up, balancing things out.

Enter exchange-traded funds. ETFs are a kind of mutual fund, meaning they allow you to purchase a number of different investments in a single transaction. In the case of ETFs, the investments within the fund are designed to track an index, like the Standard & Poor’s 500. When you buy an S&P 500 ETF, it should closely mirror the performance of the S&P 500.

ETFs are a particularly good choice if you have a small amount of money to invest: They trade through an exchange 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.

ETFs are a good choice if you have a small amount of money to invest.

The caveat here? Because ETFs are traded like a stock, they can be subject to broker stock trading commissions, which can quickly eat into the amount you have available to invest. Many brokers, especially those geared toward new investors or retirement investors, offer a list of commission-free ETFs that can be traded at no cost.

Updated September 15, 2017

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