Figuring how to invest your money gets more complicated when you have less to begin with, but you have several options if you have $1,000 to invest.
$1,000 might not sound like a lot of money to invest with, but don’t underestimate the power of your money. Technology has made it easier and more affordable than ever to invest $1,000 in the stock market.
There are more diverse investment options than ever before, which is both exciting and confusing. The confusion part is what I’m going to help you with so you can learn how to invest $1,000.
8 Smart Ways to Invest $1,000 in 2021
1. Invest in a 401(k)
A 401(k) is a company-sponsored retirement savings account, and it’s a perk that some employers offer to full-time employees. If your company offers one, investing in a 401(k) is a great way to invest $1,000. The reason is it’s how to invest $1,000 and double it.
Double my investment!?
If your company offers a company match, that means your employer will double your contribution up to a certain percentage of your gross salary. The average 401(k) match is between 3% to 6%. So if your company offers a 4% match, for every $1,000 you contributed, they will match $40.
Most 401(k)s won’t allow a lump sum investment of $1,000, so here’s an idea: you set up your 401(k) contribution, but keep the $1,000 in an emergency fund to act as a cushion since your paychecks will be a little smaller. Depending on your budget, you may not even notice the contributions coming out of your wages.
The annual contribution limit for most 401(k)s is $19,500 for 2021, and this number is typically adjusted annually. So don’t think you’re limited to only a $1,000 investment.
You can start contributing to your 401(k) by contacting your company’s benefits specialist or HR department. They can help you set up your 401(k) and contributions so you can start investing $1000.
2. Open an IRA
An IRA is another kind of tax-advantaged retirement account and stands for Individual Retirement Account. It’s a solid alternative to a 401(k) if your company doesn’t offer them, or if you’re self-employed.
There are two basic types of IRAs: Roth or traditional. The difference between these two types is the tax advantage, which you can choose. Here’s how these two differ and who they’re best for:
- Traditional IRA: Contributions to a traditional IRA are made with pre-tax dollars, so they can lower your tax liability. Earnings on a traditional IRA grow tax-deferred until retirement when you pay taxes on the disbursements you take. Traditional IRAs are ideal for people who think they will be making less money in retirement.
- Roth IRA: You pay taxes on the money you put in your Roth IRA. That means your money grows tax-free, and you don’t pay taxes on retirement disbursement. A Roth IRA is best for people who think they will be earning more in retirement.
The annual contribution limit on IRAs is $6,000 for 2021, and the limit is adjusted annually like the contribution limits for 401(k)s. People who are over 50 can up their IRA contributions to $7,000 in 2021.
An IRA is a great retirement savings vehicle, and a great way to invest $1,000. Most brokerages offer IRAs, and you can open one up in a matter of minutes with your Social Security number, name, address, birth date, and other basic information.
Most IRA providers don’t charge fees, unless you’re using a robo-advisor who advises how you invest your $1,000 and future contributions. Robo-advisors either charge a flat monthly fee or a small percentage of your invested funds.
M$M tip: Self-employed people, I highly recommend reading Self-Employed Retirement Plans - What Are Your Options in 2021? This article covers different kinds of IRAs, specifically for self-employed workers.
3. Invest with a robo-advisor
Robo-advisors automate the investing process and take a lot of the guesswork out of investing. These are digital platforms that use algorithms to determine the best investments to meet your financial goals. Robo-advisors recommend an investment portfolio for you (a diverse collection of ETFs (exchange-traded funds), and automatically invest your money, whether that’s $1,000 or another amount.
It’s not difficult to find a robo-advisor that charges around 0.25% to 0.30% in advisory fees. That’s an annualized percentage based on the amount you have invested. On $1,000, that’s $2.50 to $3 per year.
Robo-advisors also do some of the more technical investing work for you, like rebalancing your portfolio if you become over or underweight in any area — this keeps your portfolio diverse and on track for your goals.
There are so many different robo-advisors these days, but the two I recommend investing $1,000 with are Betterment and Wealthfront.
Betterment
Betterment charges 0.25% for account management, has no account minimums, and offers robo-advisory services on IRAs and individual brokerage accounts. Betterment takes a goal-based savings process to investing your $1,000, starting with asking you about your financial goals and timelines. Then, Betterment recommends the best type of investment account and asset allocation for each of your goals — you can set and save for multiple goals simultaneously.
Betterment does automatic rebalance and tax-loss harvesting, which helps you lower your tax bill. Betterment also has in-person financial advice packages if you want personalized support.
Wealthfront
Wealthfront is another top robo-advisor, and they charge the same low 0.25% fee for management services. There is a $500 minimum investment, which isn’t a problem, since you have $1,000 to invest, but still worth noting. Wealthfront offers IRAs and individual brokerage accounts, but they also offer 529 college savings plans.
Wealthfront does not have any in-person financial planning services, but they do have a free financial planning service called Path. It’s a fully automated service that you link all of your financial accounts to, and Path analyzes your finances to make recommendations.
Investing in individual stocks gives you more control over what’s in your portfolio, and even a $1,000 investment is enough to build a diversified portfolio, especially if you buy fractional shares.
Buying fractional shares, or micro-shares, is when you buy a stock or ETF percentage instead of the entire share. For example, instead of buying a whole share of Tesla at $701.24 (price at writing), you could buy 1/10 of the stock for $70.12.
This is a much more affordable way to diversify your portfolio and still self-direct your investments. Buying fractional shares is a great way to start investing without much money, and a growing number of brokerages are offering fractional shares with $0 commissions, so you’re not wasting any of your $1,000 investment on fees.
M1 Finance is one of a number of brokerages that sells fractional shares, and they sell them down to 1/100,000th of a share with a minimum buy of $1.
The Stash App is a micro-investing app that sells fractional shares of stocks and ETFs. Stash thematically organizes all of their ETFs — think ETFs for companies that focus on combating carbon, female-led companies, or American innovators. This thematic style of investing makes it easier for new investors to invest in securities they’re interested in, but it’s also the start of socially responsible investing.
M$M tip: No matter how you invest your first $1,000, I highly recommend keeping track of your investments with Personal Capital. Personal Capital is a free investment and net worth tracking tool with features to help you plan for retirement and lower your fees. My wife and I have been using it for several years, and you can read about my experience in my full Personal Capital review.
5. Invest in ETFs
Exchange-traded funds (ETFs) make it much easier for you to diversify your portfolio, even easier than investing $1,000 in fractional stock shares. The reason is that ETFs are a basket of securities that trade just like stocks.
An example of a well-known ETF is the Vanguard Total Stock Market ETF (VTI). This ETF tracks the performance of the entire U.S. equity market. Meaning you have exposure to over 3,500 stocks.
Another benefit of investing $1,000 in ETFs are passively managed funds, making them less expensive than actively managed mutual funds. Mutual funds are inherently diverse and similar to ETFs, and the average expense ratio (cost of management) is 0.5% to 1%. But ETFs have expense ratios closer to 0.2%. Those percentages all sound small, but those small differences add up over time.
If you have $1,000 to invest, ETFs are an inexpensive way to diversify your portfolio in one single purchase. But you can also invest in fractional shares of ETFs if you want to spread your $1,000 out even more.
It’s easy to find commission-free ETFs at most brokerages now. M1 Finance offers over 1,300 different ETFs, and Stash has more than 3,000 thematically branded ETFs.
6. Open a high-yield savings account
When most people think of investing, they don’t think about starting a savings account, but high-yield savings accounts are a good way to park your money while earning a little bit of interest.
Interest rates are relatively low right now — close to 1% or lower — so you’re not going to see a considerable return. Putting your money in a high-yield savings account is a more liquid investment than investing $1,000 in the stock market. This is a solid option for those who don’t have an emergency fund or a short-term savings goal.
Here are a few good places to invest your $1,000 in a high-yield savings account:
- Ally Bank offers a 0.50% APY with a $0 minimum starting deposit and no monthly maintenance fees.
- Live Oak Bank has an APY of 0.60%, $0 minimum balance requirements, and $0 maintenance fees.
- Marcus by Goldman Sachs has an interest rate of 0.50%, $0 minimum balance requirements, and $0 maintenance fees.
7. Invest in real estate
This might surprise you, but there are many ways to start investing in real estate that don’t involve buying rental property, flipping houses, or a massive investment. Real estate investing has become more affordable and accessible than ever before, and you can start with a $1,000 investment or less.
One of the best options is through Fundrise REITs (real estate investment trusts). REITs are private market investments in real estate. They fund projects like new apartment complexes, commercial developments, apartment renovations, single-family homes, etc.
Investing in real estate requires a long-term commitment, and Fundrise recommends that you leave your money for at least 5 years — you’re more likely to earn a larger return. And speaking of returns, real estate is riskier than other kinds of investments, but still Fundrise saw a 7.42% return on investments in 2020. It’s worth noting that in previous years, returns ranged from 9% to 12%.
8. Pay off debt
I know this doesn’t sound like an investment at first, but hear me out. Debt is expensive, and it gets more and more expensive the longer you have it, especially high-interest rate debt.
Debt is almost like the opposite of an investment. You’re paying interest instead of earning interest, dividends, or seeing your stock prices increase in value. And it gets more difficult to start investing if you have mountains of debt hanging over your head.
I’m not saying you have to destroy all of your debt before you start investing, but paying down high-interest rate consumer debt is always a good idea.
How to invest $1,000 — the final word
Investing is one of the best ways to get ready for retirement and grow long-term wealth, and $1,000 is a great amount to start investing.
Many of the barriers to traditional investing have started to crumble with low-cost options like ETFs, robo-advisors, fractional shares, etc. Plus, brokerages have started eliminating commissions and lowering fees to stay competitive and appeal to new investors. All of that means your $1,000 investment can go so much further than it could before.
Once you’ve got your first $1,000 invested, you can keep your investments going by:
- Finding new ways to make more money
- Invest your windfalls, like tax refunds and work bonuses
- Building a budget so you can plan for your investing goals
Remember, investing is building a foundation for your future, and trust me, your future self will thank you.
About Millennial Money Man
Bobby Hoyt is a former band director who paid off $40,000 of student loan debt in 18 months on his teaching salary and then left his job to run Millennial Money Man full-time. He helps other Millennials earn more through side hustles, save more through budgeting tools and apps, and pay off debt. He is a personal finance expert who has been seen on Forbes, Reuters, MarketWatch, CNBC, International Business Times, Business Insider, US News, Yahoo Finance, and many other personal finance and entrepreneurship media outlets.
