Let me start off by saying that I am not going to suggest using $1,000 dollars for paying down credit card debts or paying to go back to school. While both of those are wise long-term financial moves, they are not really investment decisions. Investing involves committing capital to the purchase of a monetary asset with the expectation of selling that asset for a profit later. Investing involves buying a security for a return on investment. This post will look at 3 tangible great ways for you to invest 1000 dollars cash. Without further ago, let’s look at what are the best ways to invest 1000 dollars.
Best Ways To Invest 1000 Dollars
Open a Roth IRA
A Roth IRA is my favorite retirement investment vehicle outside of a 401k or a 403b. The only reason that a 401k and 403b beats a Roth IRA is if your company offers matching funds. If not, this plans do not have any advantage over a Roth IRA. You have to depend on your job to offer a 401k or 403b, but you can start a Roth IRA on your own.
You can start a Roth IRA with just $1 dollar at any major online broker like Ally Invest, TD Ameritrade, Etrade, Merrill Edge, Capital One and so on. I prefer online brokers because Roth IRA options at banks and credit unions are often limited to just certificate of deposits. Certificates of Deposit are not good assets to place inside a Roth IRA. Brokers offer more investment options. You can invest in stocks, bonds, exchange traded funds, mutual funds, and money market funds.
A Roth IRA lets you sock away up to $6,000 per year. Those age 50 and over can invest $7,000 per year due to the catch up provision. The best part is that your money grows completely tax free. This means that you do not have to pay a dime in taxes on your earnings at 59½. Your money can grow to millionaire status and still no taxes. If you want to become a millionaire, get a Roth IRA.
Take the first $1,000 that you have to invest and buy a S&P 500 index exchange traded fund in your Roth IRA. It’s the best financial move that you can make for your $1,000 dollars. You will take advantage of long-term stock market gains and pay incredibly low fees. Add small amounts of money to this index fund whenever you can. All of your money will grow income tax free. Anyone 16 and older who earns income can invest in a Roth IRA. That means your kids can use money from a summer job and start investing in a Roth IRA for retirement today.
I started a Roth IRA 10 years ago and consistently max out my Roth IRA each year. I love that I can buy and sell stocks in my Roth IRA and not trigger any income taxes. A Roth is also a good place to put a few dollars in a speculative investment that you want to trade because you will not be subjected to paying income taxes.
Open A Traditional Brokerage Account
Once you have maxed out all of your retirement accounts, then you are ready to open a traditional brokerage account. A traditional brokerage account is a way for you to invest extra capital. Let’s say, you have already committed $6,000 to your Roth IRA for the year. Should you just start parking money in your savings account and wait until the next year to keep investing in your Roth IRA? No!! You would miss out on the potential returns that your investment portfolio could be generating now. You open a brokerage account and keep investing.
A traditional brokerage account has no investment limits so you can invest however much money you choose to. Traditional brokerage accounts are only taxed at the capital gains tax rate for investments that you hold for longer than 365 days. Your tax rate will be 0 to 20% maximum based on your income when you sell an investment. I love the fact that a traditional brokerage account is the best way to get rich before retirement. I love retirement accounts but there are certain penalties that come with withdrawals before 59 ½. Brokerage accounts do not contain such penalties.
Take the extra $1,000 that you have over and open a traditional brokerage account at an online broker. This is where you can increase your position in exchange traded funds and mutual funds by buying more shares.
Buy A Mutual Fund From a Mutual Fund Company
The cheapest way to buy a mutual fund is to buy it direct from the investment company that offers it. My first investment in the stock market was a Principal Financial mutual fund that I purchased directly from the Principal Group. I purchased the fund because the minimum to invest was only $50 and there were no brokerage fees. (You can read about my experience here.)
Buying stock through a broker is cheap but buying mutual funds through a broker is another story. It is far more expensive to buy a mutual fund from a broker than buying a mutual fund from the mutual fund company itself. Most online brokers charge fees between $4 to $7 to buy shares of stock in companies like Facebook or Amazon. But buying a mutual fund from an online broker can cost $29 to $50. There are fees for additional purchases of mutual fund shares as well.
Buying mutual funds directly from a fund company will save you on transaction fees. For example, a T Rowe Price fund that costs $49.95 to buy at one online broker costs absolutely nothing to purchase directly from T Rowe Price. You get the added benefit of being able to enroll in automatic asset builder programs where you buy $50 of shares in a mutual fund each month automatically with no fees attached. Major fund companies sell their own funds with no fees directly through their website. You can complete an application in a few minutes and open a fund pretty quickly.
$1,000 is enough to open an account at most mutual fund companies although some of the higher end fund companies may require $2,500-$10,000 to open an account. Some are even higher. A few years ago I called Pabrai Investment funds to open an account and was shocked to learn that the minimum investment was $3 million dollars. That was an eye opener! Find a fund company that allows a $1,000 minimum investment.
The best way to invest 1000 dollars depends on your investment philosophy. Conservative investors should buy an index fund, balanced fund, or target date fund. More aggressive investors can place their $1,000 in a midcap or small cap growth fund. Income investors can buy a dividend fund.