New to Investing? Here Are 5 Easy Ways To Invest $1,000
If you’re not already investing, you need to join the bandwagon, but it can be difficult to know where to start.
Investing is the secret to turning a small amount of money into a large fortune. Even if you can only invest $1,000 today, your net worth can grow with time. But, that doesn’t happen until you invest your cash.
The magic behind investing is compound interest. In basic terms, your investments grow in value with extra effort required by you. Of course, after you make the initial investment.
Let’s say you have $1,000 to invest now, where should you focus? We will cover five effective methods to invest that money now, and get on that investing bandwagon.
- Low Cost Index Funds
- Individual Stocks
- Crowdfunded Real Estate
- Peer to Peer Lending
- Starting a Side Hustle
Although investing $1,000 doesn’t seem like much, it’s the cornerstone of your portfolio. Remember, you need to think long-term when you invest. The following ideas are great ways for new and experienced investors to build a diversified portfolio that earns passive income.
Where to Invest $1,000
Most people think that the only way to invest is in the stock market. While the stock market is the easiest way to invest, it isn’t the only way. We’ll start with different stock investing ideas and move into a few stock market alternatives.
No matter which ideas you decide to pursue or avoid, always follow these cardinal investing rules:
- Diversify, Diversify, Diversify
- Understand what you’re investing in
- Only invest money you’re willing to lose (not every investment makes money)
By spreading your $1,000 and future investments across different ideas, you can maximize your potential income. And, you can minimize your risk by not having all your cash in one investment type.
Invest in Low-Cost Index Funds
As a new investor, all my money went into broad market index funds. They invest in every company of a certain index like the S&P 500. Also, most index funds hold shares hundreds, if not thousands, of companies for instant diversification.
A sharp 10% share price drop in one company of a 500-company index fund won’t affect your portfolio as seeing $1000 of stock shares only be worth $900.
Index funds are the most effortless and least risky ways to invest in stocks. It’s also perfect if you don’t have the time or desire to research and handpick individual stocks.
Although you can lose money with any investment, studies routinely show that investing in index funds produces higher long-term returns than actively investing in stocks that try to beat their market benchmark. One reason is it’s hard to always pick stocks that perform better than the market. And, trade fees and taxes erode your earnings.
You should hold a basket of stock and bond index funds for U.S. and global investments. There are a few different portfolio allocations you can pursue. Or, you can use an automated investing platform like Betterment which invests in index funds while taking your age and risk tolerance into consideration.
Picking single stocks is riskier than investing in index funds and sector funds.
Only being able to invest $1,000 at once only lets you invest in a handful of companies. I only buy stocks when my position in one company is less than 5% of my total portfolio value to keep my portfolio balanced. Following this rule, a $1,000 investment in one stock means your total portfolio is worth at least $20,000.
It’s not unusual for stock prices to gain or lose 5% to 10% of their share price in a single day. When people say the stock market is a rollercoaster, this volatility is what they mean. If a sharp drop like this makes you want to hit the sell button, you might want to stick with index funds which won’t drop as much as single companies can in one day.
Also, most online brokers charge $4.95 each time you buy or sell shares of each company. These reduce the amount of money you invest. If you’re going to be investing small amounts of cash each month, investing in funds helps you avoid these upfront fees. And, it’s easier to maintain diversification.
If you want to invest in stocks, consider these types of stocks first.
Trying to find the next Google, Amazon, or Microsoft that’s going to turn you into a millionaire overnight is like playing the lottery. Many people try, but very few win the jackpot.
Instead, you might try looking for Dividend Aristocrat stocks that have a history of paying dividends for at least 25 consecutive years. Each quarter, you can receive a dividend. Most brokers reinvest your dividends for free and buy more shares (aka compound interest). You can also use the dividends to invest in other companies too.
There are currently 53 Dividend Aristocrats. While you can invest in companies you know like AT&T, Exxon Mobil, or Walmart, always perform your due diligence. Great businesses aren’t always the best investment for you. These stocks are less volatile than most stocks, but you should still research the company fundamentals.
You can also see what some of the best personal finance podcasts say about the blue chips on your watchlist too.
Real Estate REITs
Another way to earn steady dividends is with publicly-traded REITs. Most of these companies own commercial real estate and collect rent from tenants. They pass on 90% of their taxable income to shareholders as dividends.
Since $1,000 isn’t enough money to own tangible real estate, this is a cost-effective way to invest in real estate.
Although your REIT investment value mostly depends on the share price, dividends boost your earning potential. And, real estate is another way to diversify your portfolio and can be less volatile than only holding S&P 500 companies.
One risk for REITs is that you can lose money if the share price drops more than the dividend yield. For instance, the annual dividend is 5% and the share price drops 10%, your current investment value is worth less than the original amount.
Also, you can buy REIT index funds so you can invest in the broad real estate market too.
Crowdfunded Real Estate
Since 2012, you can invest in private real estate deals that only millionaires could invest in before. By directly investing in real estate projects, you can earn annual returns between 6% and 12% on platforms like Fundrise. The average annual dividend of a public REIT is approximately 5% and the share price is more volatile than private real estate.
Crowdfunded real estate requires a minimum 5-year investment before you can withdraw your money penalty-free. While you should plan on holding any investment for at least three years, private real estate is illiquid by nature. So, only invest cash you don’t plan on touching for the next few years.
You’re also directly investing in real estate projects instead of a company that owns hundreds of properties. By nature, this investing idea can be riskier as you hold fewer projects than public REITs. If a project fails, you lose any money invested in it.
I invest in crowdfunded real estate as a way to avoid stock market volatility and started with a $500 Fundrise investment. Each quarter, I earn a steady dividend that isn’t canceled out by declining share prices.
Also, Fundrise invests your money into a private REIT that holds a basket of real estate properties. While you can’t handpick properties, you can be real estate investor while having minimal investing knowledge.
Peer to Peer Lending
Another crowdfunding option is peer to peer lending. With this investing idea, you bypass the bank and lend money to individual borrowers for three year or five-year loan terms.
LendingClub is one of the largest peer lending platforms where you can earn average annual returns between 3% and 8%. Peer lending can be a good alternative to investing in bonds. But, remember that you lose your investment if a borrower defaults on their loan.
To diversify your portfolio, LendingClub only recommends investing $25 in each borrower if you have a $1,000 initial investment. You can handpick which loans you invest in. Or, use their automated investing tool that automatically diversifies your investment for you.
Starting a Side Hustle
This idea requires more effort than the other ideas, but you get to invest in yourself. One of my family friends once told me that starting your own business is the best investment one can make.
Why? You can earn more income because you’re the sole investor. Also, you’re the CEO and can shape the business vision.
On the flipside, it can take a while to begin earning a steady income. And, you may have to try a few ideas before you find what works best for you. I’m speaking from personal experience here, and any legit entrepreneur will tell you the same thing.
Ideally, you should try getting a side hustle that can earn passive income. Since we live in the Internet age, it’s easier than you think. Some of the different ideas you may pursue include:
- Starting a blog
- Posting videos on YouTube
- Writing an ebook
- Designing clothing where the platform prints and ships items for you
- Publishing a video course
With these options, you post your content, and the world can access it at any time. While you should continue producing new content to expand your brand, you can still earn income from your existing content as long as people still find it relevant.
Starting your own business can also be a good way to change careers. You can do something you enjoy and still earn enough to pay the bills and invest in these other passive income ideas.
Why Should I Invest?
Retirement is the main reason why I invest. And, that might be your main reason too. All of us only have one chance at retirement.
You can’t assume you will be healthy enough to delay retirement and keep working until you can afford retirement. Also, you may want to use retirement to pursue interests and side hustles that you enjoy because you can finally afford to leave your full-time job.
So, the sooner you start investing, the more income you can earn.
Bank Account Interest Rates Don’t Keep Pace With Inflation
Keeping your money is a low-risk way to earn interest. However, your current interest rate might only be between 0.01% and 2% APY. The historical inflation rate is generally 3%. Even though your bank deposits earn interest, your money is still technically losing value.
Investing helps you earn returns that outpace inflation. You should still keep your emergency fund and money you need within the next three years in a savings account.
Investing for Retirement Lowers Your Taxes
While you don’t have to invest exclusively for retirement, (I recently sold some investments to become debt-free), investing for retirement has several tax benefits.
With a traditional 401k or IRA, your contributions grow tax-deferred. You reduce your taxable income for the current tax year, and you only pay taxes when you withdraw your cash in retirement.
Roth IRAs and 401ks require you to pay income tax on your contributions now. But, you don’t have to pay taxes on your contribution or earnings ever again.
For the tax year 2019, you can contribute up to $16,000 per year ($25,000 if you’re 50 or older). Annual IRA contribution limits are $6,000 if you’re under 50 years old and $7,000 if you’re 50 or older.
Investing $1,000 might not feel like a lot of money. But, investing small amounts each month helps you build a large nest egg. So, remember to invest early and invest often to maximize your potential returns.
How do you plan on investing your cash?