Saving up $1,000 on your first investment is a huge milestone! Rather than blow the $1,000 on a frivolous purchase, you have decided to invest the money for your future. Thatâ€™s a big achievement, and one you should be proud of. If you are new to investing, you might not know what to do with that $1,000. One of the very best options to invest $1,000 is through a tax-advantaged retirement account, like an IRA or Roth IRA.
Here are six additional investment option ideas for both new and seasoned investors.
Invest for Retirement
As stated earlier, probably one of the very best options to invest your $1,000 is through a tax-advantaged retirement account, such as an IRA or Roth IRA.
A traditional IRA works similarly to an employer-sponsored 401(k) plan, where your contributions are made with pre-tax dollars. That means if you put $1,000 into your IRA, you will save about $250 on your taxes this year. However, you pay taxes on withdrawals during retirement and will have to pay a tax penalty if withdrawn before you reach the legal retirement age of 65.
A Roth IRA uses after-tax dollars, so you donâ€™t get any tax savings this year if you choose a Roth for your $1,000. But you do not have to pay any capital gains taxes when you withdraw for a qualified reason, like a first home purchase, or during retirement. Typically, a Roth IRA is the best decision for younger investors and a traditional IRA is best for someone nearing retirement.
You can open an IRA or Roth IRA at any major brokerage, and most IRA accounts are completely fee free, aside from trading fees. Unlike a 401(k), you can invest in virtually any stock, bond, mutual fund, or ETF through an IRA or Roth IRA account. For most retirement-focused investors, Warren Buffettâ€™s advice is best: put the funds in a low-fee S&P 500 index fund and let it sit there for 30 or 40 years.
Invest With a Robo-Advisor
In the days of Don Draper, you would have to call a stock broker and pay an expensive trading fee to buy and sell any stock, or you could hire a professional financial advisor to handle your investments for you.
Thanks to rapid technology changes, the need for a human advisor has gone by the wayside outside of some special and complex circumstances. Why pay an expensive human to do something a computer can do for you?
Robo-advisors are companies who help you manage your investments for a much lower fee. They invest your funds in mutual funds and ETFs based on a profile you fill out at signup explaining your investment goals and risk tolerance.
Bonus tip: most robo-advisors offer IRA and Roth IRA accounts so you can get the best of both tax savings and low-cost investment management.
Popular robo-advisors today include Betterment, Wealthfront, and Futureadvisor. For robo-advising with a more personal touch, consider Personal Capital or the automated Intelligent Portfolios platform at Charles Schwab.
Invest in Yourself
While the traditional meaning of investing is focused on the stock market, that is far from your only option. You can also invest the $1,000 in yourself to provide for better career opportunities in the future.
Increasing your earning power can pay off big. If you invest $1,000 in a class or course that improves your job skills and performance, that could lead to a raise. If you can invest that $1,000 and learn something that leads to a $250 per year raise and you are in your mid-30s, that will be worth at least $7,500 over the course of your career. And it could lead to even more opportunities!
No matter what your industry is, there are always ways to learn more and improve yourself. For ideas to get started, look at course services like Udemy. For a free alternative or to whet your appetite for learning, look at Kahn Academy.
Start an Emergency Fund
If you donâ€™t have emergency savings, the $1,000 might be best used sitting in a bank account. Most people should have at least 3-6 months of expenses saved up in an emergency fund in case of a worst case scenario like a layoff or other type of income loss.
According to a recent study by Bankrate, 28% of Americans have no emergency savings at all. But sometimes things do happen. Water heaters break, furnaces die, and cars break down. Even the most stable jobs donâ€™t have an absolute guarantee of financial security. Having a better plan B than using your credit cards is crucial for your familyâ€™s financial security.
Most traditional brick-and-mortar banks offer terrible interest rates today, so consider putting your emergency fund in an online bank, like Ally, Capital One 360, or Everbank, to get the best interest rate possible along with simple, quick transfers to and from your primary checking account.
What Not to Do: Put it All in a Single Stock
New investors may be tempted to throw their entire $1,000 into a hot stock, but that is one of the worst options for a new investor. There are several reasons to skip this option.
First and most importantly, it does not offer a level of diversification and protection. Most single stocks are quite volatile, and your $1,000 can quickly grow or shrink based on that one companyâ€™s performance. Investing in a diverse fund, like the S&P 500 index fund mentioned above, protects you from big swings from that one company or industry.
Investing in one stock outside of a retirement account also subjects you to potentially costly capital gains taxes, which you can avoid with a retirement account.
Grow Your $1,000
At the end of the day, no one can tell you how to invest your $1,000. A key to investing success is avoiding whatâ€™s â€œsexyâ€ and â€œexcitingâ€ and focusing on the tried and true, albeit more boring, investment options.
If you are flexible and open-minded, there are many ways to grow your $1,000 or use it to protect yourself and your family. As long as you focus on long-term results and donâ€™t make any hasty decisions, you are setting yourself up for success.