Just a quick heads up, I don’t normally write articles like this, in fact this wasn’t even for my blog. Another Instagram investing page/ blog asked me to write this article and after waiting to hear back from him for 2 weeks and not seeing it posted on his blog either I decided to put this article on my blog since after all it was my hard work and effort to write it.
So, you saved up your first $500 and you want to invest it. First off, I would like to congratulate you on this feat, approximately 78% of Americans (I’m writing this in the United States, sorry to everyone outside the United States that this statistic doesn’t apply to you) live paycheck to paycheck so the fact that you escaped that cycle deserves some kudos. Before you start investing though, we need to get a couple things straight. If you have any high interest debt (i.e. credit card debt) please handle that before you even think about investing. A beginner at investing will have a hard time earning more than the debt is costing not to mention the other ways high interest debt affects your credit score and other financial aspects of your life. So first and foremost, handle high interest debt if you have it before you start investing. Secondly, if you do not have an emergency account or fund, I would highly advise to put your $500 into that before you start investing. Accidents happen, illness happens, the world is an unpredictable place and having extra money in the event of an emergency can be a life saver.
You’ve taken care of step 1 and step 2 and you still have $500 you’re ready to invest with. Congratulations you are about to embark on the path to financial success! Warren Buffett, one of the most successful and renown investors once said, “If you don’t find a way to make money while you sleep, you will work until you die.” That’s what we aim to do! Before we begin everyone should know that all investments carry some sort of risk and have different time horizons to work with. Pending your current financial situation and what you aim to do with that $500 you can take several different routes listed below.
- Invest in yourself
Let me make this clear before you go on a shopping spree, there are ample resources when it comes to free education. YouTube, Podcasts, Free eBooks, Blogs, Written articles, Company financial documents etc. are all at your disposal with an internet connection. Assuming you have exhausted the resources above or are looking for something more detailed I would recommend several investing and financial books and making the commitment to read and follow through on them. To name a few, The Intelligent Investor – Benjamin Graham, Think and Grow Rich – Napoleon Hill, Rich Dad Poor Dad – Robert T. Kiyosaki, The Little Book of Common Sense Investing – John C. Bogle. While not all directly related to stock market investing someone trying to invest their first $500 would benefit from the messages in these books. Note that buying 3-4 books will still leave you with plenty of money from your initial savings, I would suggest reading and using the advice given in the books and in this article to utilize the rest of your capital at your own will. An investment in yourself will yield dividends for the rest of your life to come, it is therefore one of the most essential investments to make early on. If the books above aren’t your forte there are several other books centered around general success that may light a fire in your heart to pursue greatness.
- CD/High-Yield Savings Account
Holding your money in a CD or a high yield savings account is a great option if you need your money to remain liquid or you have a short time horizon and low risk tolerance. Besides investing in yourself this option carries the lowest risk but also lower returns than can be seen with the other options. I currently use a savings account with a 2.10% yield. This would generate $10.50 a year in a savings account and while that is not a lot there is extremely little risk in this approach and your money is accessible.
CD’s or Certificate of Deposit have a fixed time period to invest over but have higher returns than a savings account. I quickly searched CD rates for 1, 3- and 5-year terms which produced the following yields respectively 2.8%, 2.85%, and 3.10%. (2/11/2019) These were the best rates I could find while adhering to a $500 minimum deposit and would produce returns of $14, $44, and $82 respectively. Now these returns are low, they slightly outpace inflation, but they are safe and rather liquid. I would recommend this strategy if you are new to investing and are trying to combine strategy 1 (learning about investing) and putting your money in a safe modest return investment until you know what you want to invest in.
- ETF’s and Index Funds
An ETF index fund may be the best mix of aggressive and save on this list. Let me pull up some definitions real quick to make sure we are all on the same page.
ETF – “An ETF, or exchange-traded fund, is a marketable security that tracks a stock index, a commodity, bonds, or a basket of assets. Although similar in many ways, ETFs differ from mutual funds because shares trade like common stock on an exchange. The price of an ETF’s shares will change throughout the day as they are bought and sold. The largest ETFs typically have higher average daily volume and lower fees than mutual fund shares which makes them an attractive alternative for individual investors.” – Investopedia
Index Fund – “An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor’s 500 Index (S&P 500).” – Investopedia
A S&P 500 ETF index fund provides good returns on average, low expense ratio, little knowledge or analysis required, and it provides a dividend which all contribute to their success. An app that provides these funds for a low cost would be Stash App, in addition to picking an index fund you can also pick a variety of ETF’s including those that track bonds, precious metals, technology companies, banks, etc. For the S&P 500 the following tickers IVV, VOO, SPY will mimic the index closely and save you money on the expense ratio as well.
In this strategy you are investing in the broad market which has experienced volatility recently. The index and ETF’s will experience ups and downs providing more risk but higher rates of return on average. In the event of a market downturn, the investor will not be able to withdraw the investment without realizing losses. If pursuing this strategy, the investor should understand the risk and possible length of this investment as both are much greater.
- Individual Stock of a well-known company
This strategy presents the highest risk/reward of the strategies discussed. Buying shares of an individual stock effectively puts all your eggs in one basket which adds to the risk however an individual stock can move both up or down much quicker than an ETF. Companies such as Apple, Google, Amazon, Facebook, etc. are popular options. Some stocks such as Google and Amazon have share prices of $1,000+. In this event you will need a platform that allows you to buy partial shares to be able to purchase these stocks with limited funds. I would not recommend a small cap company, penny stock, or any speculative play.
Whichever platform you choose it should be noted that a platform that minimizes brokerage and additional fees should be desired. With $500 to invest with it is critical to not waste capital on fees. Apps I am familiar with that are friendly toward beginner investors with limited capital include, Robinhood, Stash App, Acorns, M1, and Webull. Like strategy 3 a longer investment horizon is required for individual stocks.
In conclusion, there are multiple strategies to invest your first $500. Based on what your goals, risk tolerance, and investment horizon are you should be able to come to a solid conclusion on what strategy is best for you. Having a realistic approach to investing is vital, expecting 100% returns in your first year is asking for failure and discouragement. Hopefully you found this information useful and can begin your investments on a good note.
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