So, you want to try investing, huh?
Right. Let’s talk about it.
Don’t be expecting wonders to happen when you make $1,000 investment, however you need to know what are the best ways to invest $1,000.
It can really be discouraging and confusing when you think of investing for the first time. However, with little guidance, you will know how best to invest $1,000, without being confused or intimidated. In this article, we will break down the idea of investing it.
Understand Your Investing Goals When Investing $1,000
Before purchasing any bonds, stocks or funds, you have to get a realistic idea of the goal you set to achieve. There are ads out there about investment, and one reads “penny stocks can triple your investment overnight!” you shouldn’t believe it! The fact is that when you make a careful investment, with time, you are likely to get return of over 0.35% from a bank money market account at the moment.
What to expect when investing $1,000?
This infographic should give you a good overview.
However, there is a disadvantage to this, which is that a meaningful stable and safe return rate on the average is 8-10% for several years. What this means is that you should be expecting your $1,000 to turn to $2,000 in the next seven or twelve years. This might seem small, however, it’s an initial step, and you will explore best ways to invest $1,000 do better. You can get big returns when you invest with little money, if only you will apply discipline to it.
3 things to do before you start investing
- Start saving for retirement in a tax-advantaged account
Before you turn extra cash into investment, you should start saving by adding to tax advantaged (or tax-deferred) retirement accounts. There are simple way to save cash for the future in a tax supportive way.
Two ways to start are listed below:
Traditional 401 (K)
This plan is a savings plan designed for retirement and offered through an employer (or nonprofit) allowing an employee to make investment at the moment, and payment of the income taxes for earnings and the saved money will be deferred till the time of retirement when it is due for withdrawal.
It is advised that you take care of 401 (k) through making enough contributions to get lots of employer match, which fundamentally is free money provided by your employer and targeted at when you retire (as an encouragement to save, plus employers get tax benefits because they contributed to the retirement accounts of employees).
More: 401 (K)
Employer matches varies from company to company. For most company, it works by employer matching up to 50% of the contribution of employees up to 6%. This means that if you make contributions of 6% of your yearly salary to your 401(k), your employer will make a contribution of 3%.
Note: if you are making much needed contributions to meet up the employer match and you still have additional money, a Roth account is the next step Clark recommends, instead of you making extra contributions to your 401(k) past the amount matched.
Regarded as a modified individual retirement account, an individual can set aside up to $5,500 annually as after-tax income, and those that are at least 50 years or above can set aside $6,500. The incomes you earn on this account are tax-free, and you can make withdrawals without tax attached after the age of 59 and six months. This account is best and different from others because of its tax-free status. With as little as $100, you can setup a Roth account yourself! So let’s count this as one of the best ways to invest $1,000.
Quick note: in order to put more money and move towards a tax friendly account, you can open a Roth if you have a functional 401(k).
If you wish to create a Roth or 401(k) and never worry about how the money is invested, the easiest choice is a targeted fund for retirement. All you have to do is choose your preferred year of retirement and deposit all your money into it.
The money is used for many things such as big company stocks, international stocks, small company stocks and other types of bonds. Bonds are where you are the bank loaning out money to someone.
Make sure you have a rainy day fund
If you still have extra cash while saving for retirement, ensure that you have built up a rainy day savings fund before investing all of it. It is stated by experts that when you have emergency funds, then you are likely covered for three to nine months of expenses, if you lost a job. Factors that may determine the amount includes your salary, spending habits, monthly expenses, etc.
When you successfully get funds that you can access easily when emergencies arise, it is important that you don’t overstock the account if you want your additional cash to grow because the cash in a savings account earns little interest for you.
So using this $1,000 for rainy day fund can be the best investment to avoid debts in future
Pay off high-interest debt
When you pay down high-interest credit card debts rather than investing, you will get a greater return rate. You will be able to cut down the overall cost when you pay off your debt quicker because you are killing off paying more interest. Once this is done, you should now consider your investment options.
If you still have an extra $1,000 to invest…
When you have successfully contributed the needed yearly cash for your retirement accounts and also built up an emergency fund, you should now set your focus on how to make more investment without thinking about big taxes or many risks, as the case may be.
However, what you need to put into consideration first is when you think of making use of the money that you are currently investing or the time you will be in need of it.
When it comes to investing money, short-term goals and long-term goals are different things.
One thing to put in mind is that you certainly do not need to have up to $5,000 to begin investing. You can begin investing with as low as $1,000, depending on the method you choose.
Short Term Investing (less than 5 years)
- Online savings account
If you are planning to get a house or car in the couple of years to come, then it really centers on savings. It will be wise to keep your money in the bank and keep on saving for the future big purchase you want to make.
When you need money quickly, then the best place is an online savings account. Although the interest you’ll earn on cash in a savings account is about 1% (low), you won’t have to be penalized when you want to make withdrawal.
- Certificates of deposit (CDs)
Certificates of deposit also known as CDs are deposit accounts which require that for a specified period of time, from a month to several years, you commit your savings. CD term banks offer is mostly five years. What you will get for that long-term commitment is a higher interest rate, more than on a savings account. Nevertheless, you can’t access your money anytime you want it, unlike a savings account. So when investing $1,000, keep this in mind.
If you decide to make a withdrawal from a CD before the specified period of time, then you attract a penalty which you have to pay.
TIP: It is advised that you buy five different five-year CD with the money you want to invest. You have to divide the money into five different equal piles and purchase 1-year, 2-year, 3-year, 4-year and 5-year CDs in same sums.
Typically, a CD contract calls for just a 90-day interest penalty, meaning that if you go ahead and make a withdrawal before the specified date, you will have to pay a 90 days interest penalty. In the end, if you have a CD for any specified time, on a 5-year CD, the higher return should be able to cover-up the forfeit of a 90 days interest.
In order to ensure that you don’t end up paying too much for penalties if the situation turns that you need to make early withdrawal of the money, ensure that that the CDs you acquire only asks for the 90-day interest penalty. Watch out for 180-day interest penalty and avoid anything that has to do with it. Make research ahead of time so that things work out nice for you.
You might be wondering why you shouldn’t just purchase a single 5-year CD instead. Well, you don’t need to because if you only need a part of the cash, you have to cash the whole CD and start afresh. However, if you have five different ones, you get the exact type of flexibility you would get with traditional CD laddering.
Credit unions and online banks are a wonderful option for a banking that is free, fee-free and easy to access.
Money market accounts
Although you have the luxury of withdrawing your money at any point in time, this type earns a little bit less interest than CDs. But let’s see, is money market account one of the best ways to invest $1,000?
Quick note: money market accounts differ from money market mutual funds. One of the differences is that you will pay a fee if you want immediate access to your cash from a money mutual fund.
You have the option to automate contributions to a money market account or a CD, just like other savings accounts.
Long term investments (5 years or more)
The most cost efficient method to get started on longer term investing is through index funds because with this, you don’t need to do much work, and they are also cheap.
Index funds are under mutual funds, therefore, before going into what makes up of index funds and how it works, lets first of all know what mutual funds is.
Fund tracker Morningstar defines mutual funds as a collection of bonds, stocks or other kinds of assets which is managed professionally by an investment company on behalf of those investors that don’t have the knowledge and time to purchase an expanded assortment of individual securities such as bonds, stocks etc. on their own. A fee of 1% or higher is charged by on the investors in exchange, and this means that for every $10,000 investors put in, they pay about $100.
It is true that a professional handles mutual funds actively since they tend to be more expensive for investors because it is the duty of the professional to pick and select the stock they feel will perform better.
For this reason, it will benefit beginner investors more if they go for an index fund.
Index Fund to
Is Index Funds the best ways to invest $1,000? Let’s go deeper. With an index fund, instead of having a professional pick and select individual stocks, you are in charge of all or almost all of a specific type of investment. A single index fund can invest in multiples (hundreds or even thousands) of bonds or stocks in a single fund. So whenever you make investment in an index, know that the indexes are the Dow, S&P 500, Nasdaq 100.
The “500 index” is the most known kind of index fund. The little pieces of the 500 largest companies in the USA are all contained in this type of fund, so when you make an investment in it, you now becomes partly an owner in every single one of these companies.
Therefore, since an S&P 500 index fund has a stock in all of the 500 companies, your funds will automatically grow up anytime S&P index goes up, and as a rule, goes down when the S&P goes down too.
Choices of Index Funds
You have the option to choose from lots of other choices of index funds. Some of the types of index funds you can owe are: a mid-size company index; an international index; a small company index; an emerging market index (think Third World countries); a corporate bond index; a real estate index fund, a government bond index and lots more.
You can also call index funds “Passive” mutual funds since the method of approaching investing is hands-off. Anytime you invest your money in an index fund, you are making investment in a wide range of bonds or stocks (an entire market, as usual) because you have no business buying individual stocks and selling them, or doing any research related to it. Unlike the mutual fund, there is no provision for you to pay the management fees.
To wrap it up, index funds are very cost efficient for investors.
Andrew Fiebert, a co-host of the podcast Listen Money Matters, aired his view, stating that he won’t advise people investing in individual stocks without doing thorough research. People who want to invest in individual stocks should have time to make detailed research about the inner workings of individual companies and have a clue what the research means. If not, they should continue investing in passive index funds.
Now another issue is the type of fund to invest, and as it has turned out, the younger someone is, the more stock oriented he yearns to become. And when an individual gets older, he will have more interest in having bonds. You can make it always easy with little index funds, maybe three to five, you can go wild with as much as 15.
Dollar Cost Averaging
There is a practice which involves putting in small quantity of money in same amount into an account specially made for retirement during the time of when payment is received once a month. This practice can as well be referred to as dollar cost averaging. If you are new to investing, you won’t easily swallow the idea of investing a whole $5,000 all at a time.
When you get a certain amount you have made up your mind to invest, you ought to divide it up to 12 monthly payments, which you make the withdrawal monthly and automatic from your bank account.
When you have 401(K) contributions invested in a targeted or stock retirement fund that are subtracted from your regular pay period, then you are basically dollar cost averaging.
Think about the future
When you have funds, you should invest at the right time in retirement fund, and do it fast. After this is done, you now get back to focusing on how you can multiply your savings and income rate, building wealth in the end. you should have it at the back of your mind that future contributions are important more than how the money is invested, at that size of portfolio and level of savings.
Invest in yourself
Investing in yourself is a great idea, and it is a wise decision to invest in your professional development. With $1,000, you have the good starting point to go on in building your skills. It is always one of the best ways to invest $1,000 to yourself.
You can decide to start learning a professional course or courses with your $1,000 and in five years’ time or less, your investment will be yielding you millions of dollars!
If you invest wisely in yourself, the future will be bright for you.
How NOT to Invest 1000 Dollars
In anything that you do in life, patience is a virtue. Doubling your money in a week in order to become a successful investor is a bad idea. The fact remains that you are most likely not going to double your investment overnight, not even in a weeks’ time, a months’ time or even a year. It is very slim for that to happen.
To make $1,000 monthly by investing, you need to invest at least $100,000.
Never forget that the trade you engage in isn’t free as it cost you money. If you purchase $1,000 of an index fund, you will have to pay between $5 and $10. It will cost you the same to sell the same index fund. In order to break even, you will have to make back $10 or $20, not including the taxes you pay on any gains. Any trade you engage in has its commission and likely taxes, therefore, when you are shifting your investments around daily, weekly or monthly, you have to make up for it by making a huge profit. How to invest $1,000 isn’t hard, you must thinks not twice but smart!
Why not invest less than $500
Have it at the back of your mind that there is a difference between stock with a low price per share and one that is a bargain at the moment. A penny stock, for instance, may look like as if it has an upside, but be an expensive and terrible investment at $0.50 per share, while $500 per share might be realized with a boring IBM or any other blue chip.
Trading less than $500 at once has little point because at that point, what you expect as profit is lesser than the fees.
New investors don’t always realize this. It looks meaningful when you think of it, if you are determined to work out and make research to find out what is the true meaning of a share price; however, if you haven’t got the lesson, it will be to your interest to invest your $1,000 at the moment into a simple index fund.
How to Invest 1000 Dollars a Month
If you have the luxury of $1,000 a month to invest, the same tactics can be applied. If you go after a full index fund strategy, select a particular day to make purchase and stick with it monthly. This is beneficial and helps you with dollar-cost averaging in which case you purchase lots of shares when the price is low and less shares when the price has risen or increased. Instead of saving up and purchasing all in one lump sum, you tend to get better profit overtime, although, instead of one trade, you will have to pay for 12.
If you follow the index fund and split stock method, you still have the option of making use of the one trade per month approach. You should buy into the index fund one month, and the next month buy into stock. However answers for how to invest $1,000, should include well thought-out solutions. With this, you have some months to look for good stock at a discounted price, or makeup your mind to invest the money into the index fund and wait until you get a great stock. Betterment definitely helps you.
Why DON’T I suggest $1000 invest in stocks
Why stock aren’t the best ways to invest $1,000?
There are many reasons why I don’t encourage you to invest $1000 in stocks. With stocks, you don’t only need to make smart decisions, you need lots of resources, you need time, knowledge and money. It isn’t a doubt that if you invest $1,000 in stocks, you can’t get good results. So before investing in stocks, here are some things to put into consideration:
High fees and competitions
The competition you find in the stock market is a very tough one. House and stocks always wins, especially when making investment in a small amount. The last person that gets paid is the small investor due to the fact that he has small amounts, and it is logical.
Scams too abound in stocks. You shouldn’t trust any number which comes out on a 10Q, not minding how it is up to government standards and GAAP compliant.
Enron meet the standards of GAAP, but when they were bankrupt, it became a mystery to see that people where having misfortunes, either going to jail or dying mysteriously. If it happens that you were abundantly loaded in their stocks, you might be next on the death list. Shareholders run from pills either to a noose or from mistreatment in a mental health clinic, and it isn’t fun to be a shareholder because of the dangers involved.
You shouldn’t expect to purchase stocks and wake-up the next morning with your bank account overflowing. Although you might have seen it in Wallstreet Wolf, don’t be deceived because it is the only place you can see it happening.
If you have as much as 20-30 years without wanting to withdraw, then you might put it into consideration. However, there are still other better ways for you to invest, so that isn’t a wise decision to make.
Stocks are boring
Truly, it might rise up and fall down again; companies might go bankrupt; out of a hundred, one makes a good increase. In addition, 10 out of a hundred make a good bankrupt. Therefore, when you’re reading about where to invest $10,000, we’ll talk about it again.
Hope it helped you to choose the best ways for your investment.