We all know that investing is the key to a healthy financial future. For millennials who start investing early, it will probably make the difference between being able to retire at a reasonable age versus needing to work until you just can’t do it any longer.
That’s because every dollar you invest for retirement now will be worth exponentially more in the future.
While this is common knowledge, there is still a level of intimidation for newbie investors who are looking to invest with very little money. Fortunately, investing has gotten even easier and more affordable with new investment vehicles and the fact that many of the biggest brokerage firms are eliminating their high account minimums.
This is good news and means that anyone can start investing. You don’t need to make that big buy-in anymore. There are also way more options, peer-to-peer lending for one, that let you find an investment strategy that matches your personality a little bit better.
And, when I say you don’t need that big buy-in, I’m serious. There are even investing platforms that let you invest your spare change… like pennies!
I’m going to save those spare change apps for another article and talk about starting with a little more cash than that – let’s go with $1,000.
It’s the extra income you could make in a month after taking my Facebook Side Hustle Course and landing your first client.
$1,000 might be what you’re getting back in your tax refund.
$1,000 might be what you’re banking a few months after doing any number of things to reduce your spending… ditching your car payment, lowering your bills, etc.
$1,000 is also a nice round number and not too intimidating of an amount to have as your first investment buy-in. Once you have that cash, then what are the best ways to invest your first $1,000?
1. Invest in ETFs
I’ll admit that I don’t love when people ask me for investment advice… I’m not a wealth advisor, investment broker, or whoever else you should ask for that kind of advice. But, I still feel pretty confident in suggesting to newbie investors that they begin with ETFs.
ETFs are exchange-traded funds that track a market index, like stock indexes, commodities, bonds, or any other basket of assets.
The “exchange-traded” part means they function similarly to stocks in that they are traded on a major stock exchange, so you can buy and sell them in the same way you would with more traditional stocks.
The “fund” part refers to the collection of assets a single share of an ETF represents. Depending on the ETF you invest your first $1,000 in, it might contain tens, hundreds, or even thousands of stocks or bonds in a single fund.
Investing in an ETF means you own a share of the marketable securities in that fund.
The reason ETFs are great for those who are looking to start investing with little money is that they come with much less risk than if you are buying single shares of a company. This is because they are inherently diverse, and diversification lowers your risk overall.
The other major benefit to ETFs for new investors is that they have a much lower expense ratio (the amount you pay in fees related to the amount you have invested in) than mutual funds do, and that’s because ETFs are passively managed instead of actively managed. To put it simply, you save money because ETFs don’t require as much managerial work as mutual funds do.
Which ETFs should you invest your first $1,000 in?
Again, I’m no investment advisor, but I’ll tell you what I would look into.
Vanguard has always been the leader in ETFs – their Total Stock Market Index (VTI is what you would look for) is their flagship fund and it’s super popular among M$M readers with its 0.04% expense ratio.
Should you invest your first $1,000 in VTI? I’d give it a strong recommendation, but please, please do your own research before taking my word for it.
M$M tip: If you need a more in-depth look at investing, I’ve got you covered with this guide: Investing 101 For Millennials.
2. Invest your first $1,000 in a Roth IRA
Roth IRAs are one of the most popular retirement savings options, and since your contributions and earnings grow tax-free, they are great for millennials who are looking to invest with little money.
Let’s talk for a second about that tax benefit. Unlike a traditional IRA, your Roth IRA contribution isn’t tax deductible, BUT you won’t pay taxes on that money when you withdraw it in retirement.
Why is that good?
Well, as a millennial, you are likely going to continue earning more, meaning you will likely reach your highest tax bracket upon retirement. When you withdraw from a traditional IRA in retirement, it’s taxed as income. With a Roth IRA, because you’ve already paid taxes on that money, you pull it out tax-free.
Starting this year, 2020, you can contribute up to $6,000 in a Roth IRA (it’s $7,000 if you’re 50 and older). When you open one, you will get to select the types of investments you’re interested in, from stocks, bonds, mutual funds, and ETFs.
Investing your first $1,000 in a Roth IRA is super simple. You can find them through most brokerages, and even many banks offer Roth IRA options.
3. Throw that cash in an emergency fund
While this isn’t an obvious investment strategy, it is one that will make investing possible. I’m going to guess you still didn’t expect to see this listed, but hear me out.
We all know the point of an emergency fund – it is cash you’ve set aside to access in the event of a major unexpected expense. Instead of putting that expense on a credit card (average interest rates are ~17%), you can pull money out of your emergency fund and save on interest charges.
The thing about credit card debt is that it’s like the opposite of investing. You aren’t earning anything on that money, rather you are paying more for spending it in the first place.
When your debt builds, it gets more and more difficult to find money to invest. An emergency fund provides protection from debt, and therefore protection for your future. Isn’t that the point of investing in the first place?
4. Invest in peer-to-peer lending
This is a newer one that I’ve been hearing my readers talk about, and it’s actually pretty cool.
Peer-to-peer lending, or P2P lending, is a fairly new practice that connects people who are looking for personal or business loans with lenders who are willing to invest in funding those loans. Instead of borrowing money from a bank, borrowers, in a sense, crowdsource the funding of their loans.
The process for borrowers is similar to what you would go through in a traditional loan process. As in, the P2P company you use will have you fill out a loan application, assess the risk of the loan, then assign a credit rating and interest rate.
There are typically lower fees for borrowers, and that ultimately means that savings is passed on to them and those investing in P2P loans.
As an investor in peer-to-peer loans, you can anonymously select the loans you invest in, and once those loans are repaid, you earn money back through the interest that is charged on that loan.
I kind of love this idea – finding a loan you are passionate about and then earning money back as the borrower realizes whatever gain that loan has allowed them.
The benefit as an investor is that you can usually choose to diversify your investment or hone it in on one borrower. The return is higher than savings, CD, or money market accounts. There is also a sense of community that comes from helping others achieve their financial goals.
The downsides? If a borrower defaults, you lose your money. They aren’t FDIC insured like a savings account. They are also less liquid than stocks because you will have to wait a set amount of time for a borrower to pay back the loan.
Is peer-to-peer lending going to be one of the best ways to invest your first $1,000? If you are looking for out of the box investing options, it could be something to look into, especially if you’re into the crowdsourcing thing.
If you’re interested in trying peer-to-peer lending, I’ve read good things about LendingClub. They offer historic returns of 4.95% to 7.10%, they let you diversify your loans, have monthly cash flow, and there are options to roll over your returns into a retirement account.
5. Go DIY with an online brokerage
At the beginning of this article, I said that some of the biggest brokerages have gotten rid of their hefty investment minimums. This is great for anyone who wants to start investing but thought they needed some insane amount of money to get started.
Rather than needing thousands of dollars to build an investment portfolio, you can literally buy individual stocks, invest in ETFs, or start a retirement fund with whatever extra cash you have sitting around.
Lower account minimums are definitely more millennial-friendly, but these brokerages also have intuitive online platforms, mobile apps, and research tools to make your first investing experience even better.
Here are a few of my top picks for who to invest your first $1,000 with if you’re wanting to take a more hands-on approach:
- Charles Schwab
- T.D. Ameritrade
- Ally Invest
There are way more than that, and you’ll want to do some research to find the best fit because depending on what you want to invest in, the fees and trading costs might seem high.
$1,000 is a great first investment, and between now and retirement you’re going to see some dips in the market from time to time and still watch your money grow… remember that investing is a looooooonng game. You’re not going to take that money out now or in a couple of years.
What you are going to do is continue investing more.
I think the biggest hurdle is just getting started, but once you do, you can throw money towards your retirement investments any time you have some extra cash. And once you create that habit, you’ll wonder why it took you so long in the first place.