In this article, I discuss six great options to invest with less than $500. Depending on your financial goals, some options may be more attractive than others.
Before You Start
Before we explore options for investing with less than $500, it’s important to consider times when you should hold off on investing.
High interest debt should take priority over investing. If you invest while you have high interest debt, you’ll likely still be losing money. Based on historical data, you can expect to see a 7.25% return on your stock market investments. If you have debt at a higher interest rate than that, it’s best to pay off the debt first. Otherwise, the return on your investment will be cancelled out by the interest on your debt.
Building an emergency fund should also take priority over investing. An emergency fund is money set aside to be used in the case of financial difficulty – such as an unexpected expense, a large bill, or job loss. It’s best to have three to six months of living expenses saved in an emergency fund. If you don’t have that amount saved, using your $500 to build an emergency fund would be putting it to better use. You can always invest later once your emergency fund is where you want it to be.
If you don’t have any high interest debt and have a healthy emergency fund, it’s time to start investing. There are plenty of ways to invest with less than $500. Here are six options:
Option 1: Retirement Account
The first option is to invest in a retirement account. According to the American Benefits Council, nearly 80% of employers offer retirement plans. If you are one of many who have access to an employer-sponsored retirement plan, investing in it is a great idea
Whether it’s a 401(k) or 403(b), you can elect how much you would like to contribute from each paycheck. If your employer matches a portion of your contributions, even better! An employer-sponsored retirement plan is a safe bet for your first investment. You can start investing with as little or as much as you want.
If your employer doesn’t offer a retirement plan, you’re not out of luck. Most brokerages offer individual retirement accounts (IRAs) that you can contribute to outside of your employer. Unlike 401(k)/403(b) contributions, the money you put in an IRA won’t be pre-tax. You can still reap tax benefits by investing in a Roth IRA. Contributions to a Roth IRA are post-tax; but withdrawals once in retirement are tax-free.
Option 2: Robo-Advisor
Robo-advisors are becoming more popular these days. These services create portfolios based on your risk tolerance and then automatically manage your funds without the input from a human financial planner. Because of their low fees and low minimum investment requirements, they’re a great option for investing with less than $500.
Betterment is an excellent robo-advisor to consider. There is no minimum deposit required. You can start investing with as little as $10. There’s a low annual fee of 0.35% if you set up monthly deposits. Without monthly deposits, the fee is $3 per month.
Option 3: Exchange-Traded Funds
Exchange-traded funds (ETFs) are similar to mutual funds but often have low minimum investment requirements. In fact, you can buy an exchange-traded fund for the price of a single share; whereas mutual funds tend to require initial deposits of $1,000 or more
ETFs are a great option if you want to diversify your investment. They give you the ability to invest in hundreds, sometimes thousands, of stocks or bonds in a single, professionally managed fund. At Vanguard, you can buy a single share of an ETF for around $50 to $200.
Option 4: Individual Stocks
This option is a little risky but worth mentioning. With less than $500, you can invest in individual stocks. One advantage of investing in individual stocks is that you reduce fees. You typically pay a fee once when you buy the stock and once when you sell it. There’s no ongoing maintenance involved, as there is with other investment vehicles.
Another advantage is that you understand exactly where your money is going. When you pick a stock, you know you own a share of that company. On the other hand, when you invest in funds, you don’t have complete control of which stocks are chosen.
There are plenty of brokerages you can use to invest in individual stocks. Here is a list of few brokerages and their trading fees:
TradeKing – $4.95
OptionsHouse – $4.95
Merrill Edge – $6.95
TD Ameritrade – $9.99
E*Trade – $9.99
A newcomer in the world of individual stock trading is Robinhood, a mobile app. Robinhood allows you purchase stocks from your phone without any trading fees. Right now, it’s only available as a mobile app – no desktop website. It’s worth looking into if you’re comfortable with technology and want to avoid the fees that come with stock trading.
Option 5: Motif Investing
Motif Investing is another newcomer in the world of investing. With Motif Investing, you can purchase theme-based stock portfolios for a single trading fee. Motif Investing offers professionally-built stock portfolios that revolve around themes such as technology, medicine, and real estate.
You can also build your own stock portfolio, or “motif”, with up to 30 different stocks for $9.95. This is a deal compared to brokerages that charge up to $9.99 to trade a single stock. Whether you purchase a professionally-built motif or build your own, you’ll enjoy not having to pay any maintenance fees on the stock portfolio.
All you need is $250 to start trading.
Option 6: Peer-to-Peer Lending
The last option is a bit unique. You can start investing with less than $500 by funding peer-to-peer loans. Here’s how peer-to-peer loans work:
A borrower applies for a loan
If the borrower meets certain underwriting criteria, the loan is listed on the platform for investors to consider
Investors put up as little as $25 to fund a fraction of the loan
All investors’ monies are pooled together and the loan is issued to the borrower
Within the next month, investors start seeing monthly payments come in from the borrower – with interest of course
Prosper and Lending Club are the leading platforms for peer-to-peer lending.
Peer-to-peer lending comes with its risks – namely borrower default. Borrowers could stop paying back the loan and leave you out of your money. Although you can screen borrowers by their risk ratings, you can never be 100% sure that someone will pay back the loan in full. By investing in multiple loans, you can protect yourself from having one default destroy your returns.
After you invest
After you choose an option and make your initial investment, you may be wondering what you do from there. I recommend two things:
Continue adding funds. Investing with less than $500 is just the beginning. If you can contribute money on a regular basis to any of your investments, your money will grow much faster.
Wait it out. Don’t worry about fluctuations in the value of your investment. When you invest money, you should be in it for the long haul. Even if you see the amount dip a little bit, know that time is on your side. Eventually, your investments will give you decent returns. You just have to let it grow over time.
