How to Invest $1,000 – The Most for Your Investment
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An extra $1,000 can put the spending part of your brain into overdrive. Should you go on a quick vacation? Buy new clothes? Invest it all in a meme stock?
Paying your bills and debts, such as credit card balances, may be the more logical option and the best way to use the money. Paying interest on a loan can be costly, so knocking down debt can be like paying yourself.
If you don’t have any debts or don’t mind having some and want to reach the middle ground between spending it all immediately and hopefully seeing it grow over many years, there is another option: invest it.
In this article
How to invest $1,000
Whether you need the money soon, such as in a month or so, or have longer investing goals, there are several simple ways to invest $1,000 for any investing strategy without paying high fees.
Some are low-risk options, which can have a correspondingly low rate of return. Others carry a little more risk, so you should gauge your risk tolerance and aim for diversification.
Our review starts with the safest and shortest investment timelines in case you need the cash for something relatively quickly. Then we’ll review investment options that can be riskier, though they should still be relatively safe over time.
- FDIC insured. Keeping your money safe
- Highly competitive rates. Earn interest immediately.
- No hidden fees. Plus, no monthly maintenance fee
- $1,500 opening deposit. Simple to fund and manage
Emergency funds
Losing a job, crashing your car, having a hospital visit, a broken water heater, and other big expenses are reasons to have an emergency fund. Having $1,000 in your pocket is a good way to start one, and contributing to it monthly should help you avoid going into debt when they arise.
A good rule of thumb is to save three to six months of expenses in an emergency fund. Starting with $1,000 may look minuscule, but it’s a good start. Any amount of money is a good start to an emergency fund.
Park it somewhere safe that offers the liquidity, meaning you can withdraw the money in a day or so if needed. Some of our suggestions below should work, starting with a basic savings account. Remember, this isn’t a fund you should expect a high rate of return on, though you may do better than a savings account if you have a high emergency fund balance and want to invest half of it elsewhere.
Savings accounts
A basic savings account won’t make you rich, but it can be a safe place to save your money for a rainy day, a down payment on a car, or any investing goals. Among short-term investments, savings accounts can keep your money safe, though often with a low return.
According to Bankrate, the average interest rate for savings accounts in the U.S. is 0.16%.
The FDIC insures most savings accounts for up to $250,000 in losses per customer, so your money is safe up to that amount.
High-yield savings account
A better rate of return can be found in a high yield savings account, where interest rates of 3.0% annual percentage yield are possible. The highest interest rates can usually be found at online-only banks, though brick-and-mortar banks and credit unions may also have deals.
Like a regular savings account, you should have easy access to your money in a high-yield savings account without paying the penalty. The accounts are often free to open and maintain from month to month.
Retirement accounts
Like an emergency fund or paying down debt, starting a retirement fund with $1,000 is a good way to invest in yourself. You’re investing in your future self, which can be hard to imagine with only $1,000 to start.
Mutual funds and index funds, among other investment options that we’ll review, are good, safe ways to invest in a retirement account for the next 30 years or more. Your employer may match your retirement contributions to a 401(k) account, which can be tax-free contributions now or tax-free when you withdraw them in retirement, such as from a Roth IRA.
Roth IRA
Putting $1,000 into a retirement account is a long-term commitment for an account in that you choose the investments, such as stocks and bonds.
Roth IRAs have historically had average annual returns between 7% and 10%. Invest your $1,000 for 30 years at 7% without contributing more to it and compound the interest annually, and your balance would grow to $7,612. At 10% interest, it would grow to $17,449.
Taxes are paid when you put money into a Roth IRA, but withdrawals in retirement are tax-free. That’s the biggest distinction between a Roth IRA and a traditional individual retirement account, or IRA. A Roth IRA is usually a better choice if you think your tax rate will be lower in retirement than it is now.
Related:
Mutual funds
Mutual funds can help you reach long-term investing goals through diversification in stocks and bonds.
With $1,000 as an initial investment, you can continue investing in mutual funds by making monthly investments through dollar-cost averaging. Mutual funds can often be bought without trading commissions.
Retirement accounts are often invested in mutual funds, though you can buy them as an individual investor.
Mutual funds average or exceed 12% long-term growth. At that interest rate, investing $1,000 and not adding to the principal will allow it to grow to $29,959 in 30 years when compounded annually, according to a compound interest calculator.
Stock market
Your risk tolerance can be high or low when investing $1,000 in the stock market. There are low-risk ways to invest, such as through diversification in exchange-traded funds, ETFs, or riskier options, such as individual stocks.
Over nearly the last century, the average stock market return is about 10% per year. Leave $1,000 in the stock market and in 30 years it would grow to $17,449, the same amount as a Roth IRA at a 10% rate of return, even if no extra money was added by you. But of course, equities are prone to wild price swings, though the price rises eventually.
Exchange-traded funds (ETFs)
ETFs are a way to invest in a range of stock, giving you automatic diversification.
ETFs are a mix of securities that are traded on an exchange just like a stock is traded. An ETF can track anything from an individual commodity to a number of securities. ETFs usually have low expense ratios and broker commissions than you’d pay by buying individual stocks.
Based on the S&P 500, which is a benchmark for returns and has an annualized return of 10.5% since its inception, the average return for an ETF is around 10%.
Related: Best ETFs
Index funds
Index funds such as the S&P 500 Index are another way to diversify your investment portfolio. The S&P 500 Index fund is based on about 500 of the largest companies in America, such as Amazon, Apple, Microsoft, and Alphabet. It includes companies from every industry, providing easy diversity for investors.
It has had a historic annualized return of 10.5% from its inception in 1957 through 2021. Its diversification makes it less risky than buying individual stocks.
Individual stocks
Picking individual stocks can be fun, but it can also require more know-how than you have and a high-risk tolerance. The best stocks to buy can be ones you research thoroughly on your own, which is a big benefit to starting an investment fund.
You should be prepared to lose your entire $1,000 investment if you buy individual stocks, though you can also profit handsomely from them. A robo-advisor or a human investment advisor can also help.
Fractional shares of a stock can also be bought at brokerages. Instead of buying two shares of Costco stock, for example, you could buy half of a share of Costco stock and spend the $750 or so leftover on fractional shares of other companies.
- Commission free stock trading.
- No account minimum.
- Trade stocks, options, ETFs, and more.
- First stock free.
Real estate
There are a few ways to invest in real estate, though $1,000 won’t get you very far. It won’t come close to a down payment for buying a house.
Real estate investment trusts, or REITs, however, are companies that own and usually operate income-producing real estate that anyone can invest in. A $1,000 investment is typically the minimum amount required to invest in public non-traded REITs and start to build wealth.
Most trade on major stock exchanges. Profits from the company are paid as dividends to investors, as are profits from any real estate sales. To qualify as securities, REITs must payout at least 90% of their net earnings to shareholders as dividends.
Crowdfunding
The real estate crowdfunding platform Fundrise allows individual investors to get into real estate investing much easier than REITs do. You can bei
It’s not a liquid investment, meaning it’s not a short-term investment and has a holding period of five years. Dividends can be paid, providing a passive income. Fundrise is a good option for beginner investors who want to add real estate holdings to their portfolios.
It charges a 0.85% management fee to cover the operating expenses of its real estate assets, which is $8.50 for every $1,000 invested in your account. Fundrise also charges a 0.15% servicing fee for managing your portfolio, which works out to $1.50 for every $1,000 invested.
Costs
Investing $1,000 shouldn’t cost you much, if anything. Any fees leave you with less money to invest in the types of investments that fit your risk tolerance.
Savings accounts are often a low-cost option. They’re usually free to open, though some may require a minimum deposit of $100 or so. Others may require only $1 as a minimum investment to open an account, and some don’t require an initial deposit. We have a list of 11 savings accounts that don’t have a minimum deposit requirement or charge a monthly fee.
Retirement accounts sometimes charge management fees, which average 1% of your assets being managed. Fees may also be charged when you buy or sell shares.
Buying mutual funds or stocks can also carry fees, especially if they’re “actively managed” by an investment advisor. The average expense ratio for actively managed mutual funds is 0.5% to 1%.
“Passively managed” funds, such as index funds or those managed by a robo-advisor, are generally lower and may even be free. Stock trades may also be free, especially among online brokers.
Fees to buy REITs total about 9 to 10% of the investment, according to the U.S. Securities and Exchange Commission. Fundrise, which we detailed above, has a management fee of 0.85%, and a 0.15% fee for managing a customer's portfolio.
Pros and Cons
Pros
- Putting $1,000 in an investment account can set you up for contributing regularly to a retirement or emergency fund, which is a gift to your future self and can help pay your bills in an emergency.
- Paying off debt is a good first step with an extra $1,000.
- Compounding interest can help your initial investment grow substantially.
Cons
- Spending an extra $1,000 immediately might be more rewarding in the short term than investing it.
- You could lose the entire $1,000 in a risky investment.
- Beware of fees for your investment choices, which cut into your profit.
- Highly competitive rates
- FDIC insured
- No monthly or hidden fees
The bottom line
One of the first personal finance lessons worth taking to heart is setting up an emergency fund. It’s not the most fun way to use an extra $1,000 that you’ve come into, but it’s a good way to start saving for a rainy day. And a rainy day will eventually arrive.
If you already have an emergency fund, then investing that $1,000 instead of spending it is a good choice. You can use this chance to learn about investing, such as the power of compounding interest and how regular contributions can grow an investment far beyond your dreams.
Ultimately, you’re investing in yourself, which may be the best investment of all.
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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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