Investment Advisors

How To Start Investing with $1,000 or Less!

Congratulations! You managed to build up a small nest egg. Now it’s time to put that hard-earned money to work.

It is harder to invest when you’re not already wealthy. Investing small amounts of money does come with higher fees and there are fewer options available. But there are ways to overcome these challenges. Here are six ideas for the best way to invest $1,000.

Double your money with a 401(k)’s employer contribution

Some employers offer 401(k) plans with matching employer contributions as a perk to their employees. These plans take money directly from your paycheck and invest it in a tax-deferred retirement fund. Most 401(k)s also allow employees to make additional deposits when they have cash to spare. The tax savings and matching contributions are like free money: a guaranteed return on your investment. You know better than to say no to free money. If your employer offers matching contributions, go ahead and max them out before investing anywhere else. It doesn’t get better than receiving free money on a tax-deferred investment fund. Of course, the overall investment fund could still go south but as long as the 401(k) is properly diversified this is as close as it gets to guaranteed returns when investing in the stock market.

The Return on Investment: ~7% + Free Money

A $1,000 investment in a 401(k) that has an average return of 7% will generate $7,612 over 30 years. If your employer kicks in a 50% match, your return will be $11,418. The actual ROI will obviously depend on the performance of your 401(k)’s fund and your employer’s matching contribution policy

Earn 5% APY in a high-yield checking account

High-yield checking accounts offer interest rates that range from 1% to 5% APY. Spectacular returns when you compare it to the average savings account interest in 2016: 0.06% APY. Particularly when you consider high-yield checking  accounts are insured up to $250,000.

High-yield checking accounts are a great option for investors who still don’t have enough to make the minimum investment in a regular mutual fund. It’s also a great place to deposit your emergency fund, regardless of how much money you have to invest. The catch is you have to meet certain requirements, such as setting up a monthly direct deposit, 10 debit card transactions, and opting for electronic monthly statements.

The Return on Investment: Up to 5%

$1,000 invested in a high-yield checking account will generate up to 5% APY. That is $50 a year or $4,322 after 30 years if you reinvest the money your make. It may not sound like much, but it is 100 times better than the average rate for a standard interest checking account.

Invest like Warren Buffett’s wife

Well, to be more precise, invest like Warren Buffett would want his wife to invest once the Oracle of Omaha is no longer around to do his magic. Yes, putting 90% of her assets in a low-cost S&P 500 index fund and 10% in short-term government bonds are the instructions Warren Buffet has left the trustee who will manage his estate once he is gone.

Return on Investment: ~10%*

(*) Although volatile in the short term, the S&P 500 index, an index that includes the 500 largest companies listed on the New York Stock Exchange, has provided an average return of 10% over its history. Assuming an ROI of 10%, a $1,000 investment would generate $100 a year. Of course, past performance doesn’t guarantee future returns, but that applies to any investment. Don’t have enough savings to meet the minimum amount required to invest in an index fund? The next tip may help.

Save on fees with a robo-advisor

A robo-advisor is an algorithm that automatically applies an investment strategy to an investment portfolio. Robo-advisors can diversify a portfolio, follow any investment strategy you want, and even re-balance a portfolio in response to market performance as a regular financial advisor would. There is one huge advantage. Unlike their human counterparts, robo-advisors don’t have mortgages to pay or kids to put through college, so they work for free. Combine a robo-advisor with a selection of well-selected low-cost funds and you have a winning recipe for a successful investment strategy. Online robo-advisors, such as Betterment, don’t have a minimum investment and charge an annual fee of 0.35% for its services.The fee drops to 0.15% for accounts with larger amounts.

The Return on Investment: 11% (?)

As always, there are no guarantees when it comes to investing in the stock market, however, robo-advisors, such as Betterment, claim they can improve the return on investment of the average do-it-yourself investor by 4% or more. On a $1,000 investment, that could mean an additional $3,243 over 30 years.

Invest in marketplace lending

Diversify your portfolio beyond traditional stocks and bonds by becoming a lender. The beauty of peer-to-peer lending platforms is you can spread your bets over many borrowers and limit your default risk. P2P platforms allow you to set automatic guidelines on the percentage of loans you want from each risk grade. Borrowers are categorized by their credit score, income, and other factors that determine their likelihood of repaying the loan. The higher the risk the better the return.

The Return on Investment: 7% to 25%

The ROI depends on how much you are willing to risk. Prosper’s platform categorizes borrowers as grade A (7.34%) to G (25.54%). The actual return to investors is a little less because you have to calculate the P2P platform’s fees and there is always the risk of defaults.

Like many people, I gave P2P lending a try just to see how it works. I started with a small investment of $500 and spread it over a mix of borrower categories. Up to now, my annualized net return is over 10%, which is 10 times better than the performance of my ETFs last year. Assuming a 10% return is typical, that would be $100 a year on a $1,000 investment, or $17,500 after 30 years if you reinvest the profits.

Invest in low-fee brokerages and wealth management funds

If you want to build your own investment portfolio, online brokerages, such as TD Ameritrade and Ally Invest, can provide you with the tools you need to buy and sell stocks or even invest in more complex investment vehicles, such as stock futures or stock options.

Another option is to invest in wealth management firms, such as Betterment or Personal Capital. These online wealth management firms build personalized investment portfolios based on the risk tolerance and financial goals of investors.

Choose a Strategy and Stick with It

You may not have Warren Buffett’s money, but his value-oriented strategy is one of the best tried and true methods of consistently staying ahead on investments. Mr Buffett tells his friends and relatives to distrust the advice of financial advisors whose income depends on the number of transactions or financial products you buy. The frictional costs alone of repeatedly buying and selling stocks, for instance, can easily eat up your profits. Instead, ignore the chatter, find a low-cost investment that fits your risk tolerance and stick with it.