4 Clever Ways to Start Investing if You Have $500

Learning how to invest money can feel like an exciting but also overwhelming time. According to a recent FinanceBuzz survey on investing habits, nearly 62% of Americans think you need at least $1,000 to open an investment account. 

But that’s not true. You don't need a lot of money. 

An initial investment of $500 or even less than that can help you create a habit that may allow you to grow your net worth.

If you're ready to get started and you want to succeed with your investment of $500, then you'll need to take a look at your financial situation and options. Choosing the perfect investment(s) requires balancing a couple of key factors: your personal finance goal and your personal risk tolerance.

Here's how to do it and four great investment options to help you make the most of your $500.

How to assess your goals and risk tolerance

First, you need to know your goal for the investment. Do you want to use the money you earn to buy a new car in three years, pay your child’s college costs in 15 years, or fund your retirement in four decades?

Second, here’s how your goal relates to your risk tolerance: From a risk-and-return perspective, you can usually take more risks to attempt to get larger returns over longer time frames.

Shorter-term goals generally require more conservative investments. You can’t afford to lose 20% of your investment in a stock market drop if you have to pay for a new roof in a year. It makes more sense to invest conservatively if you need the money at the end of the time frame. You don’t want to live in a house with a leaking roof.

If your goal timeline is flexible, you might consider a higher level of risk. Buying a new house in 10 years could be a luxury you want but don’t necessarily need. You can continue living in a rental if your down payment fund doesn’t reach its target value on time. You can delay the house purchase without any significant financial harm.

You should consider your risk tolerance, or the ability to withstand price swings in an investment, before deciding on the best investment for your money. People who get uncomfortable with market declines may choose to sell an investment due to a 20% drop in price. If that sounds like you, you may want to avoid investing in the broad stock market as a 20% drop is possible. It has happened many times in fact.

If you invest in something that is beyond your risk tolerance and then sell in a panic, you risk locking in your losses during volatile periods. This can devastate your overall investing returns. More conservative investments typically have less potential for loss, but they don’t offer as high of long-term returns either. In most cases, they require investing more money to reach the same goal.

How to invest $500 wisely — 4 smart options

If you invest $500 today, your money could grow more than you’d think over five years. But getting the most out of that money might mean considering a little more risk.

Putting $500 into a certificate of deposit that pays 1% interest wouldn’t provide huge returns. It only results in an ending balance of $525.51. But if you instead invested in an index fund that ended up with 8% returns each year, that $500 would grow to $734.66 without you having to do anything. Of course that 8% return is theoretical and actual outcomes will vary. An index fund is inherently riskier than investing in a certificate of deposit. So while you have the potential to earn more with an index fund, there is an increased risk of losing money as well.

So what are all of your options when it comes to how to invest $500 wisely? You may be able to invest in stocks, bonds, mutual funds, exchange-traded funds, CDs, and more. Here are some ideas you might consider to make the most of your $500:

1. Start with your emergency fund

Whether it’s a trip to the emergency room that comes with a large copay or a blown tire on your car, financial emergencies can derail even the best budgets. If you don’t have any savings right now, then the ideal place to put your full $500 may be your emergency fund. Emergency funds help provide a buffer from financial shocks you don’t predict without impacting your monthly cash flow.

Starting an emergency fund is easy. You could stash the cash somewhere in your house, but opening a high-yield savings account is normally a better bet. High-yield accounts tend to have higher interest rates than regular savings accounts. Plus by depositing $500 in an online savings account separate from your normal bank accounts, you add a buffer that makes it harder to spend the money on frivolous purchases.

An appropriate emergency fund is often considered to be enough money to cover between three to 12 months of living expenses. To achieve this goal, you might set up a small automatic transfer to your new account to happen every payday. This starts a healthy habit of growing your emergency fund little by little over time.

In terms of how to invest $500, you might get started by choosing to split the money between an emergency fund and investing as your first step.

2. Open an IRA

Although an emergency fund can be there for you in the short term, you may want to invest for the long-term too. The largest financial goal you’ll likely have is saving for retirement and an IRA could be a way to help you get there.

IRAs come in two main varieties that have different tax advantages:

• The traditional IRA may give you a tax deduction today, but you will have to pay income taxes when you withdraw the money after age 59 1/2.
• A Roth IRA will not get you a tax deduction in the current tax year. But your earnings do grow tax-free, and withdrawals made after age 59 1/2 from accounts that have been held at least five years are tax-free too.

You can open an IRA through many of the best brokerage accounts, banks, and even some investing apps. The investing options you’ll have with your IRA money will vary depending on the financial institution in which you open your account. Standard options include savings accounts, CDs, stocks, bonds, mutual funds, ETFs, and more. Similarly, fees will vary depending on where you hold your account.

If you don’t have an immediate need for any of the $500 and your emergency fund is full, then you could invest your full $500 in an IRA. Or you can keep dividing it up — putting a little bit each into an emergency fund, retirement account, and the stock market might motivate you to keep contributing to each.

3. Open an investing account

Some people won’t have the ability to contribute to an IRA. Others won’t want to. If opening an IRA isn’t a good fit for you, you could open a taxable brokerage account. Unlike an IRA, these accounts don’t have any tax benefits or contribution limits. You can open them at traditional brokerage firms or use one of the best investing apps.

Investing apps and robo-advisors, companies that offer financial advisor-like service with technology instead of human advisors, have changed the way people invest and make it easy for beginners to get started.

These services generally allow new investors and those with only a small amount of money to start investing at a relatively low cost. These apps can also help teach new investors about the investing process. Some even offer services that help you automate some of investing’s trickier decisions.

Depending on the app or robo-advisor you choose, they may help automate the following:

• Building a diversified investment portfolio: A diversified portfolio means you have a little money in a bunch of different investments rather than all your money in a single investment. This helps increase your chances of earning money and decrease your chances of losing it.
• Rebalancing: This is a process of reallocating your investments to get them in line with your ideal portfolio percentages. For example, you wanted 25% of your money in real estate investments, but because real estate has been performing well and some other investment has not, your portfolio has shifted to 40% real estate. Automatic rebalancing can fix this for use, using special technology designed by those with financial expertise.

You may want to consider investing with the apps listed below.

• Betterment is a robo-advisor that can help you invest in a diversified portfolio of ETFs built based on Nobel Prize-winning research. Betterment is also a fiduciary, which means it must keep your best interests in mind when recommending investments. Betterment’s technology provides advanced tax strategies that aim to boost your returns by reducing your tax liability. It will charge you a fee of .25% of assets under management (the money you keep in your Betterment account) annually (as of Sep. 29, 2020), which is only about 25% of a traditional financial advisor’s cost.
• Public is an interesting mix of investing and a social network that can both motivate you and allow you to learn from other investors. You can invest in fractional shares of stocks and ETFs with just $5. You will pay no commissions but you do have to pay regulatory fees. There is also no minimum investment amount.
• Stash also provides fractional shares, which allow you to buy parts of a share of a company or ETF when you can’t afford to buy a full share. For example, a single share of Amazon costs over $3,100 (as of mid-morning Sep. 29, 2020), but you could buy just part of one share for much less. Stash also offers taxable investment accounts, Roth IRAs, and traditional IRAs depending on the account level you choose. Depending on the account you choose to open, you may have no account minimum or just a $1 minimum. Your monthly cost will also vary spending on the account level you choose.
• Robinhood can help you invest in individual stocks, ETFs, options, and cryptocurrency. Robinhood doesn’t have an account minimum and actually pioneered the practice of not charging commissions on trades. That said, you do have to pay regulatory fees.

4. Start micro-investing

You can start adding to your potential future earnings by micro-investing today without feeling a budget pinch. Micro-investing just means you put very small amounts of money into your accounts. You may find micro-investing offers a better solution if you want to develop a habit of investing without having to save up a large lump sum.

One of the more popular micro-investing apps is Acorns. Acorns has no account minimums, which means you can start investing immediately with just $1. You can invest directly in one of five diversified portfolios of ETFs created by professionals.

One of Acorns’ more exciting features is something called Round-Ups. If you link a payment card or use an Acorns Visa debit card, your purchases get rounded up to the nearest dollar. The difference between your purchase and that rounded-up amount gets put aside. For example, if you buy a pack of gum for 75 cents, the charge will be rounded up to $1 and 25 cents will be put aside. Once those Round-Up amounts total $5, the money is transferred into your Acorns account and invested.

According to Acorns, the average user invests more than $30 per month just with this feature. It’s a great way to start investing without putting in a ton of effort.

If you have just a little money left after investing in your emergency fund, IRA, and investing app, you can open an Acorns account with your remaining dollars. Then, just watch it grow using micro-investments through the Round-Ups feature.

Bottom line

If you follow our ideas above, you might start by putting a little over $100 in each of three accounts — emergency fund, IRA, and investing account — and then put your change into micro-investing. But don’t make it too complicated. If you want your money to grow, it’s important to just get started.

When picking how to invest $500, consider your goals, timelines, risk tolerance, and other relevant factors. The above information can help with the learning process, but we aren’t financial advisors at FinanceBuzz. Each person’s situation is unique. You need to make investment decisions based on your circumstances.

Finally, don’t forget investing comes with risk. Your investments may increase in value, but they can decrease too. Never invest money you must have in the short-term if you can’t afford to lose it.