Investing for beginners is no easy task. And one of the biggest stumbling blocks for folks when they consider how to start investing is frequently the amount of money they must have to get started.
But beginning investing doesn’t require a mountain of cash. In fact, you can start investing with as little as $1,000.
To be honest, $1,000 is still a big chunk of change for most American families. That’s particularly true as wage growth stays pretty weak, and some regions of the nation still suffer from high unemployment.
But if you want to learn how to start investing, you have to start somewhere. And think of it this way — if you get paid every two weeks, you start investing with $1,000 simply by saving about $39 each paycheck for a year.
After all, investing for beginners requires plenty of self-control and planning — and if you can’t save $39 a paycheck, you may have bigger problems then learning how to start investing.
If you manage to scrape together that chunk of change, though, here are five ways to invest $1,000 now that are simple and very accessible ways to put your money to work for you.
How to Start Investing: Increase Your 401k Contribution
The first step in beginning investing is understanding the options at your disposal. And if your employer offers a 401k plan, you need to start taking advantage of it ASAP.
This is the simplest and most accessible way of investing for beginners because a lot of the legwork has been done for you already by your 401k administrator. All you have to do is sign up for payroll deductions and start saving!
If you’re already enrolled, it’s worth considering upping the ante and saving more. Remember, the math on saving an extra $1,000 is just $39 a paycheck. And over the years, with the profits you make on those investments, that $39 can really add up.
This is particularly true if your not getting the full “match” amount from employer’s 401k plan. Any investments here instantly return 100% — because your company will match your contribution dollar for dollar. Even if your 401k investment portfolio loses a little bit, you’ll still be way ahead because of the money your employer is throwing into the mix.
There is one downside to this beginning investing strategy: If you need that extra money, you’ll have to pay taxes and fees out the nose as a penalty for withdrawing your funds early. Because 401k funds are deposited tax-free with the goal of saving for retirement, you’ll have to pay a steep price to access them early. There are exemptions for certain hardships like medical bills, but they aren’t easy to qualify for.
(For more information of 401k investing, read The 7 Deadly Sins of 401k Investing.)
How to Start Investing: Buy an ETF
Investing for beginners is easy with modern tools like exchange-traded funds, or ETFs.
These vehicles are essentially diversified baskets of stocks. So rather than gamble on an individual company that could boom or go bankrupt, you are spreading your investment around to a few dozen or even a few hundred companies to ensure you spread your risk around, too.
An added bonus is that instead of actively trading stocks, paying fees of $7 or even more for each transaction, you only have to pay one time to get access to all these companies. That saves you big-time on the expense side of things.
Consider that if you make just two trades a month all year long and pay $10 a trade, you’re paying $240 in total fees. That means if you have $1,000 in total, you need a huge 24% annual return on your holdings just to break even!
So if you have a small sum to invest, you’re better off relying on the easy access and diversification of an exchange-traded fund.
These funds come in all shapes and sizes if you want to get sophisticated, varying based on geography or on investment style. But most investors should probably stick to an “index fund” like the SPDR S&P 500 ETF Trust (SPY). This fund is benchmarked to the S&P 500 index, which contains the 500 largest and most prominent U.S.-based stocks. That will cover just about all your bases.
And with a net expense ratio of just under 0.1%, this ETF costs you less than $1 a year in fees on your $1,000 investment – quite a bargain for the peace of mind it offers you by spreading your cash around 500 different stocks like Apple Inc. (AAPL), Exxon Mobil Corporation (XOM), General Electric Company (GE) and other giants of business.
How to Start Investing: Buy a Bond
If the prospect of stock market investing is too risky on its face, you can begin investing by getting into bonds instead.
Bonds are effectively debt — but instead of you being the borrower, you are actually lumping your “investment” together with a bunch of other people to become the lender.
As such, you are given interest payments regularly as a return on that investment.
One of the safest investments in the world is to loan money to the U.S. Treasury by buying government bonds. You can do this easily by registering online at Treasury Direct — the online portal of the Treasury that allows individuals to participate in bond sales of as little as $100.
The low-risk nature of U.S. Treasury bonds means that there is also a low rate of return — but considering that most bank savings accounts deliver pennies (or less) in interest each year, the prospect of getting a few bucks back instead is a marked upgrade on your $1,000 investment.
How to Start Investing: Pay Down Your Debt
Speaking of debt and interest … investing for beginners often involves thinking about growth, but you shouldn’t overlook the power of liberating yourself from personal debt.
Using $1,000 to pay off extra principle on your debts is a great choice for those with student loans, a mortgage or anyone with high-interest-rate borrowing under your belt.
This is particularly true if one or more of those loans is variable rate, meaning your interest payments rise as the broader interest rate environment rises — which it is almost certainly expected to do in 2015 and into 2016.
Interest payments can take a big chunk out of your budget, so your investment returns will actually be more spending money each month. Consider that 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.
How to Start Investing: Invest in Yourself
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, buy some tools, take out a few ads and see what happens.
Remember, stock market investing for beginners is fraught with risk — and many folks just getting started simply don’t have the knowledge to make a go of it. So why not put your investment towards something that you’re an expert in, and have a passion for?
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.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks.Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
