Congratulations, you’ve just won 1,000 dollars!
Well, maybe you won 1,000 dollars. More likely, you’ve been trying a new budget, reached a new milestone thanks to your automated savings plan, or you received a bonus or raise at work. However you come up with an extra grand, you have an endless list of options to use it.
If you want to know how to invest the cash for the future, here are some ideas for the best way to invest 1,000 dollars.
While you can get a 401(k) from your employer without doing too much work, you typically have to go out on your own to set up a Roth IRA. Roth IRA accounts and 401(k) accounts are both retirement investment accounts, but they work differently.
A 401(k) is a “pre-tax” retirement contribution. That means you don’t pay taxes on the funds you invest, but you do pay taxes on withdrawals during retirement. A Roth IRA is an “after-tax” contribution, which means you pay taxes upfront but no capital gains tax on withdrawals.
401(k) plans are great because they’re easy and employers often match what you contribute. However, a Roth IRA tends to offer younger investors better tax savings, and you can invest in anything you want, like stocks, bonds, or mutual funds, where a 401(k) is limited to the investments your employer offers.
You can open a Roth IRA account for free at nearly any major investment broker such as Vanguard, Charles Schwab, Fidelity, Scottrade, eTrade, TradeKing, ShareBuilder, or any other broker you choose. If your student loans are under control, you can absolutely still contribute to an IRA. It’s arguably the best way to invest 1,000 dollars.
If you are brand new to investing and don’t know the difference between a municipal bond fund and a real estate investment trust, don’t worry. Robo-advisors like Betterment make it easier than ever for a newbie to invest 1,000 dollars in the market.
With Betterment, new investors fill out a short questionnaire about investment goals and risk tolerance. Based on the results, Betterment allocates your funds to low-cost investments and manages them on your behalf. With 1,000 dollars invested, Betterment’s fee is about .30 cents per month (or $3 a month, if you choose not to enroll in their auto-deposit program).
With Betterment, you don’t need to know how to invest 1,000 dollars. They take care of it for you!
The entire peer-to-peer lending industry is only 10 years old. While the market was about $5.5 billion in 2014, accounting firm Price Waterhouse Coopers estimates it could reach $150 billion by 2025.
As a peer-to-peer investor at Lending Club, you can invest in as small as $25 increments to create a portfolio of loans. When the borrower makes a payment, you get your portion of the principal and interest payment over the life of the loan.
If the borrower makes consistent payments, you win big. If they stop making payments, you are stuck with an investment loss. That is why it is so important to have a diverse portfolio of loans. If one borrower stops paying, you can still make a great return if you split your 1,000 dollar investment between 40 loans.
If you want to get in on the action, the biggest marketplace in the industry is Lending Club. Its market for loans is quite active and investors typically see 5 to 8 percent annual returns. Read a full review of Lending Club here.
Start an emergency fund
If you don’t have savings, an emergency fund may be the best way to invest 1,000 dollars. An emergency fund is an important part of your financial plan, as it comes to the rescue when something comes up that you were not planning for.
It’s best to have at least three to six months of expenses saved in case you have an unexpected job loss or big unexpected expenses like a broken down car or home repair.
Emergency funds are best held in an online high-yield savings account where you are not tempted to touch outside of an actual emergency. Committing to invest 1,000 dollars is a great start, but odds are you will need to save more to reach the savings you need.
A new business
Rather than investing in the financial markets, consider investing in your future by starting a side hustle business.
To start a business, you don’t have to worry about fancy business plans. You just need a product or service, a target market who will pay for it, and a way to deliver. The rest is commentary.
Who knows? Maybe you can turn your passion project into a full-time career.
Early loan payoff
While not technically a way to invest 1,000 dollars, putting an extra grand into your student loans can save you a lot more thanks to compounding interest.
Try out our nifty student loan prepayment calculator to find out how much you can save through early payments. Take it a step further with the payoff vs. invest calculator to see where your money is best put to work.
Once you pay off 1,000 dollars of your student loans, you don’t have to pay interest on it ever again. At 6.8% interest, that’s about $5.67 per month in savings. If your loan has nine years left, that is over $600 in interest payment savings.
Invest in yourself
If you have your personal finances under control, consider investing in yourself. Take a class at a local community college, enjoy an educational trip, or explore your creative side with a music, art, or cooking class. You never know what you’ll learn — and learn about yourself — until you try.
There is no one-size-fits-all best way to invest 1,000 dollars, but there is a best way for you. When you want to know how to invest 1,000 dollars, look at your finances and decide if retirement, entrepreneurship, loan payoff, or maybe an investment in yourself is the best decision. Whatever you choose, you can count on great dividends in the future.
Want to get started investing?Here are the top investing options for 2018!
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