by Jeff Reeves | October 26, 2012 9:40 am
Times are tough. Many folks are out of work, and many more are underpaid and worried about becoming unemployed. What little extra cash families can find in their monthly budgets is subsequently squirreled away in a savings account or similar “rainy day” fund. A common personal finance mantra is that you should have at least three months salary stuffed under the mattress for emergencies.
But if you make the median U.S. household income of nearly $50k a year, you’re pulling in $3,000 to $3,500 a month after taxes — meaning an emergency fund of about $10k. That’s a huge chunk of change to have just sitting around earning a fraction of a percentage point in annual interest through your bank’s savings account. That doesn’t even keep up with inflation!
Of course, if you’re nervous by nature that’s the price of peace of mind. But if you want to put a few thousand bucks of that emergency fund to work for you, there are many ways to do so. Here are five easy and reasonably low-risk ways to invest as little as $1,000 now.
Are you getting the full “match” amount from employer’s 401k plan? If not, you can change that immediately! That money instantly returns 100% because your company will match your contribution dollar for dollar. Even if your 401k investment portfolio loses 10% or so, you’ll still be way ahead.
The downside is that if you need that extra money, you’ll have to pay taxes and fees out the nose as a penalty for withdrawing your retirement funds early. And of course, if you’re already meeting your employer’s match, then this isn’t quite as attractive an option — though putting more away now will certainly have benefits. The compound interest on just an extra $1,000 a year will be quite impressive after 20 or 30 years when its time to retire.
(For more information of 401k investing, read: The 7 Deadly Sins of 401k Investing.)
In the words of financial journalist and web entrepreneur James Altucher, his best investment was “in either myself or people I knew very well who were building companies.”
If you have a knack for writing, just a few hundred bucks can get you a domain name and server space for a website. If you have a knack for home improvement, take out a few ads and see what happens.
The downside, of course, is that this equation is most profitable if you consider your time isn’t worth much, and those folks with a busy schedule may find the idea downright impossible. 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.
If you don’t have confidence in your own abilities or think striking out on your own is too risky, how about investing in your peers? There are a numerous peer-to-peer lending sites out there, including Prosper, Lending Club and others.
How do they work? Essentially, you are the bank and your fellow Americans are the borrowers of small sums. You front the cash and get paid back with interest! Of course, like a CD this is an illiquid investment and you can’t get the cash back right away if you need it in an emergency. But with typical return rates of 7%-10% annually, there is much higher incentive. Then again, there is also the risk of default — and fees the portals take off the top. But done right, P2P lending can be highly lucrative.
What’s more, if you invest in borrowers with a worthy cause, you can be sure that your loan is making someone’s life better at the same time it’s enriching your bank account.
If you’re actively trading stocks with just $1,000, it’s very likely you’re paying more in fees than you are making in profits. For instance, if you make just two trades a month all year long and pay $10 a trade, you need a 24% annual return on your holdings just to break even! On the other hand, putting all your eggs in one basket via a single stock investment is a very risky proposition.
So if you have a small sum to invest, you’re better off relying on the diversification and know-how of an exchange-traded fund or ETF. Such an investment is a group of stocks similar to a mutual fund, only there’s no minimum investment to overcome. And in case you miss the fun of picking individual winners, there are hundreds of ETFs in all shapes and sizes — from funds that track gold to funds that track only financial stocks to funds that go up when a sector goes down! This way you can play a specific sector or strategy without the risk of putting all your cash into a single company or paying too much in trading fees.
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% on your home, over the life of your 30-year loan you will pay $1,200 for every $1,000 in principal! Paying down even a small amount of your loan early can drastically reduce what you’ll be paying down the road. And in the case of credit card debts and other short-term loans with higher rates, the payoff is even bigger and more immediate.
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.
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