You may scoff at the idea of any investing right now. After all, times are tough. By some calculations, inflation-adjusted net worth of U.S. families was lower in 2010 than in 1989 — not exactly a sign that many people have cash to burn.
I hear you, and I fully support the common personal finance mantra of socking away at least three months salary for emergencies. But the fact is that the time to start planning for retirement is not when you are only a few years away — and the time to get the most bang for your buck is sooner and not later. After all, there’s a reason Einstein allegedly called compound interest “the most powerful force in the universe.”
Consider that $1,000 invested now at a 5% annual return — a modest figure and hardly unrealistic — will turn into over $4,300 in 30 years! Further more, consider that if you just scrape together a measly $100 annually to add to that, you’d have about $11,300 in 30 years!
A little goes a long way, so don’t think investing is out the question right now. Otherwise you may be feeling the squeeze as retirement approaches.
Instead, consider these five easy ways to invest $1,000 now:
#1 – Increase Your 401k Contribution
This is incredibly simple since it involves no extra work other than a trip to HR to adjust your allocation. Just add a mere $83 a month extra and you’re paying in $1,000 a year.
There are big bonuses beyond the extra investment too — your pre-tax income is reduced by this contribution, there’s no complication of an extra investing account to manage and you get to “average in” your investment over time to ensure you’re not buying a top in the stock market.
And if you’re not already getting the full “match” amount from employer’s 401k plan? Well, you’re actually going to be investing more than that $1,000 annually if you take this option up — because your employer will throw in to your retirement account, too! It’s like giving yourself a raise simply for planning for retirement — something you should be doing anyway. (For these reasons, if you’re not taking the match — one of the 7 Deadly Sins of 401k Investing — I actually advise you to do much more than just invest $1,000!)
Another plus: If tragedy does strike, you have access to your 401k funds. There are circumstances that will force you to pay taxes and fees on the withdrawal, of course, but at least it’s available to you in some form.
#2 – Buy an Indexed ETF in an IRA or Brokerage Account
If you are a bit savvier and want access to more investing options, consider opening up an IRA or brokerage account to actively trade ETFs. Short for “exchange-traded funds,” these investments are like mutual funds but are liquid like stocks and come in much broader varieties.
But don’t get too distracted by the bells and whistles — with just $1,000, you should stick to low-cost ETFs with a rock-bottom expense ratio. This ensures you don’t erode your nest egg with costly fees paid to a manager with fancy cars and expensive suits. Instead, stick with an index fund — a vehicle that relies on a set list of investments instead of a human hand picking stocks.
Popular (and cheap) index funds come in all kinds of flavors — from the SPDR S&P 500 ETF (NYSE:SPY) that tracks the S&P 500 index to the iShares Russell 2000 Index ETF (NYSE:IWM) that follows the Russell 2000 index of smaller companies to even international indexes if you want exotic investments.
Oh, and if you have an IRA? Like a 401k contribution, there are also tax benefits to contributions depending on your income.