Only having $1000 to invest can be frustrating — everywhere you turn, you run into barriers. Many 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. A dollar-for-dollar match up to 6 percent of pay is currently the most common match, although many companies match 50 cents for every dollar contributed up to 6 percent. Some match less, or not at all.
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 (more on that later).
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. The downside: It’s a college savings plan, and you might not need or want to save for college education. Withdrawals for other purposes trigger a 10 percent federal tax penalty plus income taxes on any gains, but this is still a great option for college-bound people who only have $1,000 to invest.
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 $1000 to invest. Big-name companies such as Vanguard and Schwab now have digital investment services, but Betterment was one of the first to offer this fully automated option — and it’s doing so with no minimum investment requirement, which is rare.
Betterment charges account management fees of as little as 0.25 percent. That’s in addition to the underlying costs of the exchange-traded funds, which range from 0.09 percent to 0.17 percent.
The average mutual fund charges 1 percent each year, and many investors pay an additional 1 percent 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 $1 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, Johnson & Johnson.
The big drawback to DRIPs is that small investors (like those who have less than $1000 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, like 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 $5 to $10. That’s great news if you’re investing a lot at once, but not if you’re investing small amounts.
Many brokerages offer low-cost mutual funds and ETFs without trading fees, but they have minimum investment requirements. At Vanguard, widely considered a low-cost leader, you typically need $3,000 to invest in their actively managed funds, or $1,000 if you’re buying a Vanguard Target Retirement Fund. T. Rowe Price has a $2,500 minimum for mutual fund accounts and $1,000 for IRAs. Schwab has no minimum, and neither does Fidelity (at least for IRAs).
Don’t have enough? One option is to simply save up until you do. Most online banks have no account minimums or fees. They pay better interest rates than typical brick-and-mortar banks, with high yield savings account rates currently in the 4-5% range. (Bankrate has a good tool to help you find the right bank for you.) The difference between that and what investing can earn you, though, may provide just the motivation you need to save enough to meet a discount brokerage’s minimum and start putting your money to work.
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