by Jeff Reeves | August 31, 2012 7:00 am
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:
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.
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.
The housing market is battered, but many experts believe that a recovery is underway — or at least, that a bottom is being formed. Therefore, one of the best investments you can make right now is to fix up your home with the expectation of boosting your resale value.
Replacing an entry door with a midlevel 20-gauge steel door is an inexpensive upgrade for a little more than $1,000, and pays back about three-quarters of that in resale value according to industry estimates. Decent garage doors are more like $1,500 but pay back at a similar rate. A much cheaper option is to simply go with storm doors for the front and back – decent quality doors cost only a few hundred bucks apiece.
Another quick fix? Redo the vanity, faucet, mirror and light fixture in your bathroom. If the walls aren’t fully tiled slap on a quick coat of paint and presto — a weekend project that’s reasonably easy to do yourself and costs about $1,000. Bathrooms are small and thus the easiest to update.
Other DIY ideas include a coat of paint and crown molding to gussy up a living room or bedroom or laying a small area of tile — either as a floor or backsplash in the kitchen for some flair or in a bathroom with a modest footprint.
Tile, paint and door installations are relatively easy projects to do yourself. That way you don’t just save money, but have satisfaction in a job well done.
In the words of author and web entrepreneur James Altucher, his best investment was “in either myself or people I knew very well who were building companies.” I fully believe in this notion.
If you have a knack for writing, just a few hundred bucks can get you a domain name and several months of server space for a website. If you have a knack for home improvement, take out a few ads and buy some tools, then see what happens. If you want to do wedding photography, buy $1,000 worth of gear.
The downside, of course, is that this equation is most profitable if you consider your time isn’t worth much. Those folks with a busy schedule may find the idea downright impossible because they can’t give up their “day job.” But aside from the satisfaction of being your own boss — even on a part-time or occasional basis — you may find this is the most profitable long-term investment you’ve ever made.
After all, if you build a successful business from scratch there is nobody standing between you and the profits. The sky is the limit.
This is a great choice for those with student loans, a mortgage or any long-term borrowing under your belt.
Even if you have a rock-bottom interest rate of just 4% or lesson your home, over the life of your 30-year loan you will pay $1,200 for every $1,000 in principal! Car loans and student loans have shorter life spans so they are not as painful, but the bottom line is that every penny of principle creates a lot of interest payment over time.
Since paying down even a small amount of your loan early can drastically reduce what you’ll be paying down the road, you can consider a bigger principle payment an “investment.” Or in real terms if you have a $1,000 balance in personal debt on your credit card with a 10% annual interest rate, you are “earning” 10% by paying that puppy off now and avoiding the interest by carrying a balance for a year.
That’s to say nothing of the benefits you may reap through an increased credit score — and the added bonus of one less bill to pay each month.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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