One of the most common misconceptions about investing is that you need a ton of money to start.
However, that couldn’t be farther from the truth.
In reality, even small sums of money have the ability to work for you:
That’s why today we are going to look at 7 easy ways how to invest $500.
Let’s dive in.
Open an Investment Brokerage Account
A great long term way to invest $500 is by opening an investment brokerage account.
Having one of these accounts will give you access to buy, sell and hold different investments such as stocks, bonds and mutual funds. They are essentially a checking account for your investments.
There are two main types of investment brokerage accounts that you can choose from:
Traditional Brokerage Account
A traditional brokerage account is a standard investment account where you can buy, sell, hold securities.
These types of accounts are also referred to as taxable or non-retirement brokerage accounts. This is because the dividends and realized capital gains are subject to taxes in the year that the money is received.
While they don’t possess the same tax benefits similar to retirement brokerage accounts, money in traditional brokerage accounts can be withdrawn before the age of 59 1/2 without any penalties.
Traditional brokerage accounts are great if you are looking to do short to medium term investing because there are no penalties associated with cashing out (other then paying applicable taxes).
Here is a non-exhaustive list of companies where you can open a traditional brokerage account:
Individual Retirement Account (IRA)
The Individual Retirement Account (IRA) is a tax-advantaged investment account specifically designed to save for retirement.
Like traditional brokerage accounts, IRAs also allow you too buy, sell, hold a variety of investments… except these accounts come with a nice tax break.
The type of tax break depends on whether you invest $500 into a Roth or Traditional IRA.
Investing $500 in a Roth IRA would allow that $500 to grow 100% tax-free. Any associated gains or dividends associated with that $500 can be withdrawn tax tree.
Investing $500 in a Traditional IRA would give you a tax deduction today by lowering your taxable income. However, the associated gains or dividends associated with that $500 would be subject to taxes upon withdrawal.
At the end of the day, the only difference is when you want to experience the tax benefit.
Opening an IRA is as easy as navigating over to a company like Fidelity or Vanguard and taking 10 minutes to fill out some basic paperwork.
Open a High Interest Savings Account (Emergency Fund)
A great short term option to invest $500 is opening a high interest savings account.
Not only do you maintain quick access to your money, but high interest savings accounts also pay upwards of 15 – 20 times more interest than traditional savings accounts (national average is currently 0.06%).
Similar to traditional savings accounts, these accounts can also be NCUA and FDIC insured up to $250,000.
The higher interest from these savings accounts also offer a passive way to protect your money against inflation as well.
I personally use 3 different high interest savings accounts for my projected medium to long term cash needs. More specifically, this includes my emergency fund & kitchen remodel fund.
I recommend checking out Bankrate for the best and most up to date offerings (they do a great job with keeping their lists updated).
Contribute to an Employee Sponsored Retirement Plan
Contributing to an employee sponsored retirement plan like a 401k or 403b offers a lot of benefits.
Similar to IRAs, contributing to a 401k can provide tax benefits depending on the type of contribution.
A Pre-Tax contribution would lower your income today, but would require you to pay taxes on any gains upon withdrawal. A Roth contribution is made with money that’s already been taxed, allowing that money and associated gains to grow tax free.
Furthermore, let’s just say you can only make a small one time investment of $500.
Assuming that $500 earns 10% a year on average, this is what it would look like 40 years later:
While investing $500 initially didn’t seem like a lot, it eventually grew to $22,629.63. Assuming you made a Roth contribution, that money would be tax free upon withdrawal.
Finally, your employer might match the first X% on your contributions. These employer matches are essentially free money, meaning at the very least you will have automatically made X% on your $500 investment.
Given the long-term tax benefits, compounding growth, and possible immediate risk free returns… contributing to an employee sponsored retirement plan is one of the best ways you could invest $500 long term.
Buy a Certificate of Deposit
A great middle tier option for short term investing are Certificate of Deposits or CDs.
CDs are similar to bonds in that you are investing a fixed amount of money for a fixed period of time while earning a fixed interest rate. However, CD’s are better short-term investments and are considered safer than bonds.
Common time periods for CDs are 3, 6, 12 & 24 months.
When you invest in a CD, you will be unable to withdraw your money until the CD’s maturity date. If you do want to withdraw your money early, this will result in a early withdrawal penalty.
However, while you can’t touch your money without an early withdrawal penalty, you are locking in a guaranteed interest rate on your money. Interest rates on CD’s are typically higher than those of high interest savings accounts because the money is tied up for a fixed period of time.
With all that said, investing in CDs is easy. You can either look at online bank offerings for the best rates or even just walk into your local bank’s branch.
If you know you will need that $500 in the next few months/years, CDs offer the opportunity to lock in higher interest gains without any chance of losing your principal investment
Pay Down High Interest Debt
I know that paying down high interest debt sounds like a weird way to invest $500, but let me explain.
Let’s assume that you have carry a credit card balance with an interest rate of 16.28% (the 2020 average).
However, stock market returns are 10% on average.
This would mean that paying down the credit card balance would provide a 6.28% higher return on that $500 than investing in the stock market. This is because the credit card balance costs more than the potential returns through investing.
This is the same logic on why paying off your mortgage right away isn’t always the best idea if you have a low interest rate locked in.
Assuming a mortgage rate of 4%, your money has the potential to earn 6% more on average versus paying down the mortgage.
Start a Side Hustle
There are a lot of great reasons to start a side hustle:
- Building multiple streams of income
- Paying off debt
- Potentially turning into a full time job
- Having a sense of personal satisfaction
Personally, I started this website with the fourth bullet point in mind.
The ability to have a creative outlet while also helping increase financial literacy is what drives me to write. And this website cost me under $50.00 to start!
The fact is that starting an online business has never been easier.
From the low overhead to the ability to instantly reach millions of people, online side hustles can start making money on day 1 – especially with a $500 investment!
Open A Cryptocurrency Account
I put this section last because this type of investing is still new and speculative in nature.
However, let’s say that you want a slice of going “to the moon” and want to invest in Bitcoin, Ethereum or even… DOGE (sigh).
This is remarkably easy to do. All it requires is 10 minutes to sign up for a cryptocurrency account via an exchange – similar to that of traditional brokerage accounts.
Two of the more popular and trusted exchanges where you can open a cryptocurrency account are Coinbase and Kraken.
No matter what exchange you use, if you are serious about investing in cryptocurrency, I would strongly recommend purchasing a cold wallet to store your cryptocurrency.
Cold wallets are essentially a specialized USB drive that is not connected to the internet and therefore not vulnerable to network hacking. This article from Gemini does a great job explaining the differences between cold and hot wallets in more details.
Final Thoughts
$500 may seem small, but it can have a large impact.
Depending on your life circumstances, there are a lot different ways to enable that money to work for you.
Whether you want to safely earn some short term interest while saving for a vacation or bet it all on DOGE for a one way ticket to Mars, investing $500 is a great start to hit your goals.
How would you invest $500?
Thank you for reading! 🙂
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Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.