5 simple ways to invest $1,000 now
The unemployment rate continues to drift steadily lower, gas prices remain cheap relative to years past and the stock market continues to bump up against all-time highs. And as a result, many Americans are finally getting their finances back in order.
But what should they do with that extra cash cushion?
The first place to look is at your savings account, which should have three to six months of your salary saved up for unexpected hardship. After all, if the financial crisis and Great Recession taught us anything, it's the importance of a safety net.
But after you've covered yourself with a rainy day fund, where should you turn next to invest that money, putting it to work and making it grow?
If you've recently found your financial footing and have a small sum that you're looking to invest, even if it's only $1,000 or so, here are five simple ways to get started:
1. Increase your 401(k) contribution (or start contributing if you're not already)
There are a host of reasons why you should make good use of your 401(k) if you have one through your employer — or if you're not maxed out yet, increase your contribution to that plan.
For starters, many employers offer a "match" of some kind, where they put, say, 50 cents into your retirement account for every dollar that you put in. More generous companies even match you dollar-for-dollar.
That's a big reward for saving, especially considering it's something you should be doing anyway.
The maximum you can contribute to a 401(k) plan in 2015 is $18,000 if you're under age 50 — so unless you're making a ton of cash, chances are you have plenty of headroom to increase your contribution another $1,000 if you're already making a contribution of some kind.
Also, because these are pre-tax dollars, you likely will see your take-home pay decrease by much less than that $1,000 over the course of the year. That's because you're reducing your taxable income by making this contribution to your 401(k) beforeUncle Sam takes his cut.
The tax man will get paid eventually, of course, and will even charge penalties if you withdraw funds from a 401(k) before age 59½. And admittedly, 401(k)s only offer a short list of investment options for your money.
But for the typical investor, putting your cash in a diversified mutual fund offered via your 401(k) and allowing it to grow steadily over many years is a powerful way to save and plan for retirement.
2. Buy an index fund
If you're a bit more impatient and don't want to wait until your 60s to access investment profits, consider opening up a taxable investing account and buying an index fund with your $1,000.
What is an index fund? Simply put, it's a pool of investments aligned to a major stock market benchmark like the S&P 500 or the Nasdaq-100. And as such, these funds are extremely transparent because the list of stocks in the portfolio is fixed, and because of their immense popularity their providers can charge extremely low management fees and still turn a profit.
Research shows that while individual companies may vary widely in performance, the stock market as a whole marches steadily higher over time — to the tune of about 7% annual returns on average. Some years are better than others, obviously, but that's what's typical in the long term. And since you're effectively buying the entire stock market this way, you can have confidence your performance will mirror this.
The SPDR S&P 500 ETF
(SPY) is the most popular index fund out there. The SPY fund is tied to the
S&P 500 index, meaning it's comprised of 500 of the largest U.S. companies, such as Apple
(AAPL),
Walmart (WMT) and McDonald's
(MCD). This index fund charges a mere 0.945% in fees annually — or less than a measly dollar for each $1,000 you invest. That's a small price to pay for a piece of the biggest names in Wall Street, and built-in diversification to boot.
And considering the fund has nearly $180 billion in assets, you'd be in good company if you invest in this index fund!
Now, you'll have to pay taxes on any profits you make — and while the market does tend to go up long-term, there is no guarantee of any profits at all in the near future. However, the diversification and low-cost structure of index funds make them an attractive alternative for investors who don't want to wait.
3. Tap a high-yield savings account or CD
With interest rates as low as they are, "high yield" is a matter of perspective. But one undeniable truth is that the rate of return you get from a typical checking account is effectively zilch, at just 0.03% at major banks right now.
That adds up to just 30 cents a year on $1,000.
The current return on so-called high-yield accounts isn't dramatically better, with a 1% rate available via many financial institutions. That adds up to $10 annually on $1,000 — which is a lot better than 30 cents, but clearly not going to make you a millionaire.
But as the old saying goes, there's a trade-off with risk and reward. If you don't like the notion of stock market volatility, an FDIC-insured savings account or CD is almost as good as cash. You may have to tie up your money for the full 12 months to get the best rates, though, so read the fine print.
But at least with a savings account or CD, you're guaranteed that the money will be there waiting for you at the end of the line … with a little bit of interest.
4. Pay down your debts
If you have a big bill on a credit card, it should go without saying that putting $1,000 toward those obligations is a good idea. But even if you don't have a lot of consumer debt, sometimes paying off extra principal on a mortgage, student loan or car loan can also be a good idea.
That's because the more principal you can pay off up front, the less interest you're paying on the remaining balance each month. Think of it as a belated down-payment of sorts.
The only catch is that because of "amortization," loan repayment schedules tend to put most of your interest up front — so the more time left on your loan, the more you save.
While the return on your investment comes in the form of lower payments instead of a windfall check, it may not seem like you're "investing" anything — but consider that paying an extra $1,000 in principal on a 4% car loan could save you $100 to $200 depending on the details. That's a 10% to 20% return on your $1,000, which is much better than the alternative.
Remember, even if you have a rock-bottom interest rate of just 4% on your home, over the life of your 30-year loan you will pay $1,200 for every $1,000 in principal. Paying down even a small amount of your loan early can drastically reduce what you'll be paying down the road.
5. Invest in yourself
If you're stuck in a dead-end job and are looking for a way out, then $1,000 could help buy you a change of scenery in the workplace.
Maybe you pay for a computer class or two at a local college. Maybe you buy that professional-grade camera and start a new career as a wedding a photographer. Maybe you simply spend a few-hundred bucks on a custom domain name and Web hosting to launch your own Web business.
Of course, when calculating costs, it's important to note that your time is worth something. But $1,000 can go a long way for people willing to seize a new opportunity.
After all, building your own business could be the most profitable investment of all — and not just in real dollars, but also in the satisfaction and confidence that come with being your own boss.
