By: Kevin Mercadante.
With worries about the economic impact of the coronavirus, you may think that investing in the stock market with $500 either isn't a good idea. You may also believe that you don't have enough money to invest. But you'd be wrong. You just have to be selective about where and how you invest your money. Here's our guide to how to invest 500 dollars.
Although your investment options will be limited, you'll still be able to invest in the stock market and come out with a decent profit. Now could be an excellent time to start investing, as stock prices on companies are lower than they've been in months. After all, investing is all about thinking about the long-term benefits, not just short-term losses or profits.
1. Start With a Microsavings Service for Your Emergency Fund
Before you get into investing, we recommend you to have a cash reserve of at least three to six months of living expenses, especially given these uncertain times. You don't have to begin with large amounts when first starting off. One of the latest trends in fintech is Microsavings services, where with just a few pennies per purchase, you'll be on your way to creating a nest egg.
Out of the various investment apps we've reviewed, we recommend Acorns as the best microsavings platform.
Acorns is a somewhat unique investing app that takes your spare change from every purchase you make. When you buy your favorite chicken burrito at Chipotle for $6.50, Acorns will round up to $7.00 and invest $0.50 from your checking account. Acorns can do this with every purchase you make. As you can imagine, this can start adding up very quickly.
It's an easy and painless way to start investing with very little money. Acorns makes the service simple and do the heavy investing lifting for you. The service costs $1 per month when you have under $5,000 and 0.25% per year after that.
2. Open a Retirement Account With Your Employer
Once you start building a nest egg for that proverbial rainy day, it's time to get serious with your retirement planning. Even if retirement is more than 30 years away, now is the time to get started since time is on your side.
With the magic of compounding, a little money every month can add up to a lot. Plus, many employers will match up to 3% of your income that you put into your 401(k). So in effect, it's doubling your money without any effort. Lastly, a 401(k) can take the bite out of your taxes now as the money goes in pre-tax.
Don't have a retirement account with your employer? If you are one of the 20% of employees for whom your employer doesn't offer a retirement plan, skip this step and go to step #3.
3. Open an IRA Account With a Robo Advisor
Robo advisors, similar to the microsavings services mentioned above, are an invention of the past five years. We differentiate them by the fact that robo advisors can deposit more significant amounts and offer retirement accounts.
If your employer doesn't offer a retirement plan or if you're looking to stuff more money into your retirement savings, an IRA with a robo advisor is the way to go.
Out of all of the robo advisors, we recommend Betterment as the best service. The service is cheap, keeps track of your goals in an easy-to-read format, and helps plan out the best way to allocate your investments. When you are young, you want to invest mostly in stocks. This is because you can afford to weather the volatility of the market. Also, the stock market is where you'll get the highest returns.
There's no account minimum with Betterment, and its management fee is just 0.25% of the account balance per year.
4. Open an Account With a No-Minimum Discount Broker
With $500, you will need to use a discount broker to execute your trades — full-service brokers and their higher commission fees won't make financial sense. There are many options when it comes to discount brokers, but your relatively small initial investment will limit your options, as many require higher amounts just to open an account.
Merrill Edge also offers brokerage accounts with no account minimum. It charges zero commission fees on online trades, although you will need to pay $29.95 if you want to make a trade assisted by a broker. Plus, it has the convenience of being a subsidiary of Bank of America, making it easy to buy stocks and see your personal finances and investing information side-by-side.
TD Ameritrade offers brokerage accounts with no account minimum, and zero commission fees on online trades. You'll need to pay $25, though, if you want to make a trade assisted by a broker. The online version is one of the most affordable out there and you can switch to a broker with a lower rate when you have more money to invest.
5. Get More Investment Options by Increasing Your $500
If you begin investing with $500, it's important to think of it as a solid starting point. Once you open an account and begin investing, your next move should be to grow your investment stake.
You should plan to add at least $50 to $100 per month through payroll contributions — you can directly deposit money into many investment accounts — or some other regular contribution method. If your initial investment is $500, and you add $100 per month, at the end of the year you will have $1,700 in invested funds — plus investment income earned.
As your investment fund grows, so will your investment options. You will eventually be able to invest in funds with higher initial investment minimums, as well as individual stocks. And if you plan to be an active trader at some point, having a more considerable amount of capital to invest will be absolutely essential.
But in the meantime, never allow the fact that you have “only” a few hundred dollars keep you from investing in the stock market.
Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.