Only having $1,000 to invest can be frustrating — everywhere you turn, you run into barriers. Some investment companies want you to pony up thousands just to open an account. Then there are fees, which can quickly eat up a big chunk of your investment even at the discount brokerages.
The good news? You have options.
First, let’s be clear: We’re talking about investing here, not saving. Saving is for short-term goals and emergency funds. Savings should be kept in safe, liquid accounts like FDIC-insured bank accounts. (Pro tip: To make the most of that money, consider putting it in a high-yield savings account!)
Investing, by contrast, requires taking some risk of losing money with the hope of future gains. The smartest way to invest is for the long term, meaning 10 years or more, in a well-diversified mix of stocks and bonds. If you can’t keep your hands off the money for at least 10 years, you probably should be saving rather than investing.
Assuming you’re planning ahead, though, here are some of the best options, no matter how little the starting amount.
Your Workplace Retirement Plan
About half of U.S. workers have access to a 401(k) or similar workplace retirement plan. Your contributions can reduce your taxes, and most plans offer some kind of company match, which translates into an instant return of up to 100 percent of what you contribute.
Workplace plans typically don’t have account minimums and most have reasonable investment costs. The money’s supposed to be left alone until retirement, though, so there typically will be taxes and penalties if you tap it early.
Don’t have a workplace plan? You can set up an IRA with a discount brokerage.
A 529 College Savings Plan
You usually can start a 529 college savings plan with a $15 to $25 minimum monthly contribution, and some of these state-run investments have no minimum investment requirement. Withdrawals from the account are tax-free if used for qualified education expenses anywhere in the country.
You’re offered a variety of investment options, including “age-weighted” plans that get more conservative as the beneficiary nears college age. Learn more about 529 plans, here.
A Robo-Advisor Portfolio
Digital investment advisors — sometimes known as “robo-advisors” — invest your money according to computer algorithms at a fraction of the cost of other investment options. The advisors typically use ultra-low-cost exchange-traded funds (ETFs) to keep costs down, which is great if you have less than $1,000 to invest.
The average mutual fund charges between 0.25% and 1% of your total investment each year, and many investors pay an additional 1% or so for a human advisor to manage their money, so it’s a pretty good deal. Still, not everyone is comfortable putting a computer in charge of their money.
Another option is Acorns, a mobile app that automatically rounds up your daily purchases to the nearest $1 and then deposits this “spare change” into an investment account. Monthly fees start at as little as $3 a month.
Dividend Reinvestment Plans
Dividend reinvestment plans, or DRIPs, allow shareholders to buy additional shares directly from the company. You may have to buy the first share through a brokerage or transfer agent, but after that, fees are typically low or nonexistent. You can invest small amounts, with many firms requiring a minimum purchase of just $25 to $50.
Some of these companies are household names: 3M, Bank of America, and Johnson & Johnson.
The big drawback to DRIPs is that small investors (like those who have less than $1,000 to invest) won’t be adequately diversified. Owning one or two or 10 companies puts you at more risk than owning hundreds or even thousands of companies, as you do with mutual funds and ETFs.
The Right Brokerage
Monthly account fees have largely disappeared from the brokerage world, and these days many offer low, flat trading fees ranging from a few dollars to as much as $20 per trade. You can compare some of the more popular online brokerages here.
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