Congratulations on having $1,000 to start investing with! You are considering making an excellent decision to start saving money and hopefully watching it grow.
$1,000 is a great place to start, but you may be thinking, “What do I invest in?”
I’ll tell you exactly how I think you should invest those dollars and will give you recommendations to look at.
We’ll get to that.
First, we have to lay some ground rules. We have to get to a place of understanding where you are in your financial journey, because that will determine how you invest your thousand dollars.
After having dozens, if not a hundred people ask me a version of this question, “I have $1,000: how should I invest it? How do I start investing with that amount of money?” I knew that I had to write a post about it.
I get it, you have some money saved up… that’s awesome! Now what?
So many people don’t even get that point. According to a Bankrate survey, more than half of Americans have $0 invested in the market at all, including their employer retirement plan, like a 401(k)! The most common answers that survey respondents gave as to why they weren’t invested were:
I don’t have the money to invest.
I don’t know where to start
I don’t trust the stock market.
Did you know that 24% of Americans no have an emergency savings at all, according to CNBC?
CNBC also reports that 32% of those ages 53-62 had ZERO dollars saved! So, you’re ahead of the game, for sure. Great job!
Now, here’s the rub.
You have options with what to do with your money. That’s the good part, and the bad part. You could spend it.
You could save it.
You could give it.
You could invest it.
You could lose it. (don’t do that)
I want to help you avoid paralysis by analysis. There are lot’s of options out there. Hopefully this helps you navigate them.
Many, many people choose to just spend it away, mostly on frivolous things that don’t bring them joy. That’s sad.
I’m going to implore you to choose to do something better with your money. But I’m preaching to the choir, right? You have at least $1,000 and want to learn how to invest it, and that’s why you’re here, reading this post… again, we’ll get there!
A word of caution:
There are so many people out for your $1,000. Not everyone, even those that give financial advice, give you advice that is right for you… or right at all.
Here’s what I mean, and here are the “ground rules.”
Don’t even consider investing that $1,000 until you can confidently say yes to the following:
Are your credit cards paid off each month?
Do you have an emergency fund big enough to cover at least 3 months of your living expenses?
Do you have a budget?
If, and I mean IF you can say, “YES” to every one of those questions, then you are ready to start investing.
Credit Cards: if you’re paying interest on credit card balances each month, by not paying them off, what interest rate are you paying? 22%? 18% guaranteed? Good luck getting that guaranteed return on your investments. You’re on the WRONG side of interest. You’re PAYING interest, when you carry credit card balances. You want to be EARNING interest by investing. It makes no sense to invest when you have revolving credit card balance that you can’t pay off each month. Pay off your high interest debt. Then move on the next step.
Emergency Fund: If you don’t have an emergency fund, then don’t invest that $1,000. No, your credit card is not an emergency fund. No, your home equity line of cred it is not an emergency fund. A proper emergency fund is a separate bank account, preferably a savings account, that is just a cash-equivalent… meaning; it isn’t invested in anything… it’s just a cash-like bank account. A fully funded emergency fund should be big enough to cover 6-9 months of your living expenses. If your living expenses are $3,000/month, then your fully funded emergency fund should be $18,000-$27,000. Yeah, sounds big doesn’t it? I’m not saying you need to have a fully funded emergency fund before you entirely invest, but it should be at least $1,000 and should preferably cover 3 months of your living expenses. Once you have a “starter” emergency fund established, then I’m okay with you starting to invest that $1,000. But you need to continue saving into your emergency fund to get it “fully funded,” asap.
To help you with all of this, you need a:
Budget: If you don’t have a budget, and you’re wondering how to invest $1,000, you shouldn’t start investing yet.
- I wrote a whole post on budgeting and why you need to do it today and how it can fix your finances. You can read about here:
The budget does it all. It’s the backbone of your finances, and everything should flow from it. Your savings goals, your spending goals, your debt-payoff goals, your investing, your income and all your expenses should stem from your budget. If you don’t have one, and you’re wondering how to invest $1,000, you shouldn’t invest yet. Get your finances dialed in. Make sure that your finances are in-check. You can do all of that with a budget. That’s why it needs to happen before you invest.
To read more about what steps to take, and in what order, I wrote a whole post all about the steps necessary to build REAL wealth.
Okay, we’re here. Now that you’ve either taken care of, or have a plan for debt, an emergency fund and a budget, we can move on to investing.
For those who are just dipping their toe into the investing world, I recommend one of two, maybe three paths.
- 100% Automated
- A Little Bit of Both
I’ll explain what these are. But to invest. We need to open an investment account.
First, before we talk about those three options, you need to know what type of account you are opening to invest in. Below is a brief summary of different 3 different kinds of accounts you can open, but stay tuned as I’ll write more posts all about IRAs and the types of accounts you can invest in.
One option is a:
Brokerage account – taxable investing account
– No account minimum or maximum
– No preferential tax benefits
– When you sell your investment, if there is a gain you pay tax on that gain
– No age restrictions for withdrawing money
A Roth IRA – retirement account
– $5,500 annual contribution limit ($6,500 for those over age 50)
– Eligibility to contribute is phased out at higher income levels (for 2017: phase out begins at $118,000 and ineligible at $133,000 for single filers)
– No tax benefit when you make the contribution. Your money grows tax-deferred, and you can take money out tax-free, if at certain age
– If you take money out before age 59 1/2, an early withdrawal penalty and tax may be due
– Some exceptions may apply to avoid the early withdrawal penalty – first home purchase, higher eduction, etc…
A Traditional IRA – retirement account
– $5,500 annual contribution limit ($6,500 for those over age 50)
– Eligibility to deduct contributions is phased out at higher income levels (for 2017: phase out begins at $62,000 and no deduction at $72,000 for single filers)
– May be eligible for tax deduction on your contribution, the money grows tax-deferred, and you pay tax on the gains when you take the money out (pay tax at your income rate).
– If you take your money out before age 59 1/2, then an early withdrawal penalty and tax may be due
This is not meant to be an exhaustive list of all the details around the different types of accounts that you can open. You do need to open an account to invest, however. So it is important that you decide what type account you want to invest in.
I recommend you look to a Roth IRA first. If you don’t have any other retirement accounts, and you have all of our pre-requirements fulfilled above, a Roth IRA is a great place to start.
One of my favorite places to open up a Roth IRA, for more of a DIY approach, is with TD Ameritrade.
TD Ameritrade is a online brokerage firm, that from my professional experience, does things the right way. You have an open architecture to invest in what you want. They charge you $6.95/equity trade, which is very, very low. They have a great reputation, and they avoid conflicts of interest to a larger degree than I’ve seen others do. They have enough scale to offer some amazing tools and pricing, but they don’t engage in conflicting relationship like other larger brokerages have. I tend to like that, and I trust that.
Now, back to our 3 paths to actually invest, which answers the question of
“How to invest $1,000.”
The 100% Automated Option
A solution for this path, is to use a service like Betterment.com – Betterment is an online, brokerage firm that offers portfolios of Vanguard funds. Betterment uses algorithms to help you determine the right portfolio for you. When you sign up, you simply answer some questions about you, your time frame, what the account is for, the amount of money you have, and Betterment then relies upon tested academic research to provide you with a very well-diversified portfolio, at a very low-cost, matched to your risk tolerance, and they re-balance and keep your portfolio in check for you, so you don’t have to. In my eyes, they are one of the best automated solutions. So much so that I personally have an account with Betterment.
The DIY Investor
For the DIY investor, TD Ameritrade has amazing tools to help you invest. What I typically recommend for this type of investor are mutual funds and/or Exchange Traded Funds (ETFs) because they are diversified by nature. I usually recommend that people look at Vanguard for the mutual fund/ETF provider. Specific mutual funds and ETFs that I like by Vanguard, are VBAIX (Balanced Index Fund), or more of an all-in-one fund, called the LifeStrategy or their time focused funds, Targt Date funds, which are designed around a specific time-frame that you may have. The Life Strategy & Target Date options are diversified and allocated funds designed around your objective (growth, income, retirement date, etc…).
Once you’ve opened an account with TD Ameritrade, you would put money into it, then you would “buy” a mix of funds, based on your risk tolerance. For starters, try following the rule of thumb, that you own your age in bond funds, then the rest in equity (stock) funds. You may find that to be a little too conservative (like I do), but it’s a good place to start. In general, these types mutual funds from Vanguard are very, very low-cost, index funds. They track a particular market index, vs. one stock or two stocks.
For the analytical investor with $1,000, and who has a real interest in investing, and likes to track stocks in their spare time, I have specific recommendation: use 80% of your money to buy low-cost, index mutual funds, like the ones I mentioned from Vanguard. Then take the remaining 20% of your money and buy a couple of stocks. I know, I know, that’s not full-diversification, but in my experience, just scratching that itch of the stock market enthusiast with 20% of their investment money, is much smarter than risking ALL of it on individual stocks. Go buy big, blue chip stocks that you may enjoy watching. Maybe Amazon (AMZN), Facebook (FB), Tesla (TSLA) or Apple (AAPL). Remember, you’re only putting a small portion into these stocks, and the rest is in low-cost index funds.
A little bit of both: Automated and DIY
A variation of the option above, is to do a little bit of both: Automated and DIY. Why not use my 80/20 rule and let Betterment manage your 80% (the serious money), and have a TD Ameritrade account, and have a few individual stocks in it, with the other 10-20% of this $1,000. To me, that seems like a great approach, especially if you have a desire to pick and track individual stocks or individual mutual funds.
Socially Responsible Investing – Automated
For those that are Socially Responsible Investing inclined, you may want to look at Motif Investing. They are an automated investing solution, but you can focus on socially responsible investing, at a very low-cost. They provide an automated solution with great rebalancing features. They have plenty of other options (other than Socially Responsible Investing), which you can check out if you’d like.
Okay, so there you have it. You first need a solid financial foundation, before you even think about investing that $1,000. I know it sounds a little harsh, but believe me, it’s the right thing to do! Remember when I mentioned that there are lots of people out there that are after your $1,000? That you need to do what is right, and not let someone talk you into acting on bad advice? There are plenty of people that will advocate for investing that $1,000 without a penny saved in an emergency fund, or with $3,000 sitting on a credit card month after month. That’s crazy and doesn’t make much sense. Remember, investing and saving is based on common sense. Advice that your grandma would give. So, just beware. Not everyone that gives financial advice, gives it in your best interest.
One last note: there are plenty of ways to invest successfully. I’m not someone that says you need to invest this way or that to have success. I have read plenty of research on investing, and wrote about that and more, in the article below:
You can check it out. The research is pretty clear, that in general, and over time, passive and low-cost mutual funds have outperformed actively managed mutual funds, which usually have higher costs. But, I also know that people are weird, and very different from one another, and quite amazing all at the same time. So, the realist in me says that I can certainly help those people that maybe want to go against the grain a little bit. That’s okay, to a certain extent.
So take what I’ve laid out above, and examine your own finances. Do you have revolving consumer debt? How about your emergency fund? Is fully funded? Have a starter emergency fund of at least $1,000? What about your budget? Do you have one? Do you stick to it? These are all questions you need to ask yourself before you invest that $1,000. Then, if all those questions are positive, decide what type of account you want to open, and what type of investor you want to be (conservative, aggressive, automated, DIY, etc…). Once you’ve done that, the hard work is done! You can then begin to invest.
One last closing comment: investing successfully requires patience, time-in-the-market, not timing the market correctly, and controlling your emotions. There will be times when your account is down… significantly. If your time horizon is longer (say 7 years), then it behooves you to stay invested, take a deep breath, and just hang in there. Heck, if you can stomach it, put more money into your investments when they are down. Buy low and sell high, right? You’d buy a little extra of your normal groceries (that you know you’d use), if they were on sale, right? I would. I’d buy an extra can of soup for next month, or extra box of crackers for next month if they were on sale. I’m just suggesting that you consider turning your thought of the market’s movements around. WHEN it goes down, we don’t panic (like everyone else does), we hold tight, possibly rebalance our account, and possibly buy more. That’s it. That’s the investing game.
I hope you feel equipped and more knowledgeable about investing your $1,000. Now go ahead! Take control of your finances, be proactive and live your life on purpose by investing & saving in your future.
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