How to Invest $500 – How to Invest a Little Windfall
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Finding yourself with an extra $500 can seem like a windfall worth spending immediately. Whether through a bonus at work, a gift, saving it on your own, or another method, having an extra $500 can burn a hole in your pocket.
Sure, you can easily spend it on something fun for instantaneous gratification. There’s nothing wrong with that. Besides, it’s not really enough money to invest, you tell yourself.
Not true. There are many ways to invest $500, and you shouldn’t underestimate the short- and long-term advantages of saving that money and benefitting from the power of compound interest.
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Why $500 is worth investing
Spending any extra money in your bank account at the end of the month is an easy way to not even think about what else you can do with the extra cash.
But you could give your future self a gift by investing it now and starting an investing strategy of saving for short-term and lifelong needs. Who knows, it could help you reach financial freedom years ahead of your friends and retire early.
And don’t underestimate an initial investment of only $500.
If you invest $500 in the stock market and earn the average stock market return of 10% that it has earned for nearly the last century, in 30 years it would grow to about $8,700 when compounded annually, according to a compound interest calculator provided by the federal government. That’s without making any extra contributions on your own.
That’s just one way to invest $500. We’ll go into how to invest in the stock market, a retirement account, savings accounts, a real estate investment, or using what may seem like a small amount of money to make your financial life easier by paying down debt or starting an emergency fund.
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Ways to invest $500
Pay down debt
Paying down debts such as credit card debts sounds boring, but it can be a smart first step in your personal finance journey before saving and opening an investment account.
Debt can be expensive. Suppose you have a credit card balance of $1,000 and are charged an 18% interest rate. Making the minimum monthly payment of interest and 1% of the balance would take you 113 months to pay off and include paying $923 in interest.
But cut that balance in half by paying $500 off immediately, and making the minimum payment would take 47 months to pay off and the remaining $500 and you’d pay $198 in interest. The $500 you put toward eliminating this debt would save you $725 in interest.
Paying off credit card debt and other debts can leave more money to put into savings accounts or invest.
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Start an emergency fund
An emergency fund may sound like another boring place to put an extra $500, but it won’t be so boring when your car needs to be repaired or you face another unexpected bill.
Ideally, an emergency fund should have six months of living expenses. The money should probably be put in a savings account so you can withdraw it quickly without paying any fees for early withdrawals, such as in a certificate of deposit or pulling money from a retirement account.
Open a savings account
Your financial goals should include short-term savings not just for emergencies, but for upcoming expenses such as a down payment on a car or home, new furniture, vacations, the birth of a child, and other costs you expect in the next year or so. Long-term goals such as childcare, college, and retirement can also be saved for in savings accounts, though you’ll likely get better returns through other financial products.
As of March 21, 2022, the national interest rate on savings accounts is 0.06%, according to the FDIC, which insures most savings account deposits. A $500 deposit at that rate, compounded annually or monthly, would earn 30 cents in interest after one year.
Earning interest isn’t usually the point of a savings account. It’s a safe place to put your money and you can get access to it quickly. A high-yield savings account can be opened at online-only banks, where interest rates of 0.50% are common.
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Fund a retirement account
If you don’t already have a retirement account and contribute to it monthly, then $500 is a good place to start. If your employer offers a 401(k) plan and both you and your employer contribute to it, then that’s probably the best way to start because you’re getting free money from your employer.
Contributions can be tax-free now in a 401(k), or you can open a Roth IRA and have tax-free withdrawals in retirement. Either way, you’ll likely have to pick the mutual funds, index funds or other types of investments for your retirement funds to be invested in, so make sure to keep diversification among your accounts. You can also use a robo-advisor or other financial advisor to help you.
Retirement accounts can include more types of investment than stocks and mutual funds. Peer lending platforms can be invested in through a Roth IRA and other retirement vehicles.
Related: How To Make the Most of Your 401(k)
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Invest in the stock market
A $500 initial investment in the stock market isn’t much, but it can be a way to get you started and possibly become a regular investor.
All of the earlier suggestions for investing $500 are extremely safe, especially for a long-term goal of retirement. Investing in the stock market, however, can be volatile and test your risk tolerance. It should be money you’re willing to lose if individual stocks drop dramatically.
It can also be a big part of an investment portfolio and can get you the best returns on your money. As we noted earlier, the average stock market return over the last century is about 10% per year.
There are a few ways to invest in the stock market. The most interesting may be to buy individual stocks or fractional shares through a brokerage. Companies such as Acorns and Robinhood allow users to buy stocks, including with small amounts of money.
Stocks can also be bought as a group through exchange-traded funds (ETFs) and index funds to give your portfolio diversification and spread out your risk.
ETFs are a mix of stocks that can be bought as one unit. They’re usually cheaper to buy than individual stocks, and spread your risk among a range of stocks.
Index funds are similar groupings of stocks. The S&P 500 Index Fund, for example, is based on the 500 largest companies in America. It has a historic annualized return of 10.5% from its inception in 1959 through 2021.
Invest in real estate
Real estate investment isn’t just for homeowners or the rich. If you can increase your $500 to $1,000, then you’ll have the minimum amount required of new investors in a real estate investment trust or REIT. They trade on major stock exchanges and profits are paid as dividends.
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Costs
The best news about these financial products is that a small amount of money such as $500 can get you started as an investor. With regular contributions, you’ll be building wealth over your lifetime. Many of the types of investments we reviewed don’t charge much, if anything, in fees, so your profits won’t get eaten.
Paying off debt is usually free, as are opening savings accounts for an emergency fund. Some savings accounts require a minimum deposit of $100, while others require only $1. Many savings accounts don’t charge a monthly fee. If they do, it can often be waived by meeting minimum balance requirements.
Retirement accounts are free to set up, though you may be charged management fees of 1% of your assets. Selling shares may also incur some fees.
Stocks, ETFs, index funds, and mutual funds may be free to buy, but management fees from 0.5% to 1% of the account balance may be charged if they’re actively managed. Passively managed funds such as index funds or a robo-advisor usually have lower fees. The fees online brokerages charge may be the ones they’re charged by government regulations, so they’re essentially passing the fee on to you.
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The stock brokerage website Robinhood doesn’t charge fees to open or maintain an account, and it has zero-commission trades. It does, however, charge regulatory fees it must pay when selling stocks. Robinhood’s plans are free, though an upgraded account called Robinhood Gold costs $5 per month and offers margin investing, detailed reports, and other extras.
The micro-investing website Acorns has three investment accounts, costing $1, $3, or $5 per month. Customers can invest in stocks, set up a retirement account, and run their daily finances with a checking account at Acorns.
Buying REITs can cost about 9-10% of the investment in fees. You can find REITs in online sites like Fundrise.
Beginners and even investing veterans should shop for the best prices for any investments they plan to make. If a company raises its fees, you should shop elsewhere for one that has lower fees. Sometimes the best investment can be one with no fees.
Pros and Cons
Pros
- A $500 investment may not seem like much, but it can be a good start to investing and lead you to make monthly investments.
- If you don’t have an emergency fund or retirement account or have credit card debt, then a $500 infusion can get those accounts moving in the right direction.
- Stock trades are often free, but be sure to check for other fees that you might be charged.
- Compound interest always works in your favor.
Cons
- Stocks can be more risky than other investments, so do your homework before buying and be prepared to lose your entire investment.
- Savings accounts don’t pay well for now, so putting too much money in savings could lower your savings when adjusted for inflation.
- Paying down debt is a great idea, but it can quickly show you how small $500 is when trying to eliminate debt.
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The bottom line
If you find yourself with an extra $500 at the end of the month, you can do your future self a big favor by saving it or knocking down some of your debt. Becoming an investor and saver isn’t as complicated as you may think it is, and can often cost nothing or very little, which may encourage you to save on a regular basis.
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Writer
Aaron Crowe is a freelance journalist who specializes in personal finance writing and editing. He has worked at newspapers, where he won a Pulitzer Prize, and has written for numerous online publications. These include AOL, US News & World Report, WiseBread, Bankrate, AARP, and many websites focusing on housing, credit and insurance. He lives in California with his wife and daughter.
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