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How to Invest $1,000 Right Now

There are more ways to invest your $1,000 now than ever before.

Justin Cupler

Contributing Writer at Tally

July 28, 2021

Saved up $1,000 to invest? Congratulations on this achievement. Now, what should you invest this money in? 

There are many investment options to choose from, and determining the best way to invest will depend on your financial situation and goals. 

Below, you'll learn how to put  $1,000 to work using various investment strategies, ranging from investing in the stock market to becoming a peer-to-peer lender. 

Investing in the stock market

The stock market can seem intimidating to a beginner, but simple to use apps, such as Stash and Robinhood, have made it more accessible for all types of traders. A big determination to make when investing in the stock market is deciding what to trade. There are plenty of offerings to choose from, including stocks, mutual funds, exchange-traded funds (ETFs), bonds and more. 

While investing in the stock market has become easier for everyday people over the years, there is still significant risk involved. 

Unlike a bank account, there is no insurance against losing all your money in the stock market. If you invest in a company and its value falls dramatically, you risk losing a significant portion of your investment. And in some cases, you could lose your entire investment. 

Trading stocks

Traditional stock market investors trade stocks. These stocks are tiny ownership shares in a company. For example, if you buy one share of Microsoft stock, you're purchasing a tiny percentage of the company. The company then uses your investment to fund the business. 

Making a profit with stocks can pay out in two ways. First, if the stock price increases due to company success, a merger or other variables, you can resell your stock at a higher price and keep the profits. 

Second, stocks pay dividends, which are small, periodic payouts based on company revenue. Dividends typically come quarterly.  

Investing $1,000 in the right individual stock could also lead to great gains. For example, if you invested $1,000 into Amazon when it debuted in 1997, your investment would have been worth $12,398 a decade later

The downside to investing in individual stocks is they can fluctuate wildly each day. While stocks typically return 9.2% annually on your investment, you could lose all or most of your money. For example, debuted in 2000 at $11 per share and rose to $14 per share. By November 2001, its stock price collapsed to just 19 cents per share when it filed for bankruptcy. 

Investing in stocks also requires a lot of research into an individual company to mitigate potential losses. You can hire a financial advisor to help with this research, but that can be costly and eat into your potential gains. 

Trading ETFs

Instead of trading individual stocks, you can also trade ETFs. ETFs are collections of related stocks held by an SEC-registered investment company packaged together to buy on the open market. You buy into these funds, and their value fluctuates throughout each trading day according to the stock price for each company within the fund. 

A benefit of investing in an ETF is its affordability. There are generally minimal fees for buying and selling them. Plus, diversification across multiple stocks within the fund mitigates the possibility of a total loss. 

While ETFs offer diversification and fewer fees, there are some downsides. ETFs are sold at market value, which can be higher than the net asset value (NAV) per share. Also, by spreading your investment, you have less opportunity to strike a big return like you might with a single stock. Finally, ETFs aren’t entirely fee-free; there are often management fees associated with them.

Trading mutual funds

A mutual fund is another investment option for those who want to invest in the stock market. They are almost identical to ETFs. 

Unlike ETFs, mutual funds:

  • Must be purchased from the fund itself, which is often a broker, not from the open market.

  • Are sold at the NAV per share, not the market price.

  • Have transaction fees for buying, selling and trading.

  • Recalculate their NAV at the close of each trading day instead of fluctuating in value throughout the day.

Like ETFs, mutual funds mitigate total losses through diversification, but they also limit your ability to make huge gains off one successful investment. These investment portfolios may also include management fees and transaction fees, which can erode some of your gains. 

Trading index funds

Index funds are variations on ETFs and mutual funds, but the key distinction is they are created to mimic a specific financial market index, including the Dow Jones Industrial Average (DJIA), S&P 500 Index and the Nasdaq Composite Index.

Like mutual funds and ETFs, index funds are generally lower risk than a single stock, but the low risk could mean a lower return. Because they offer steady growth, many investment professionals recommend these for later-year investors who need long-term growth to maintain their retirement income but have a low risk tolerance. 

Trading via robo-advisor

Robo-advisors, like Betterment and Wealthfront, allow you to tinker in the stock market without knowing much about it. By entering your age, income and financial goals, a robo-advisor can find the best investments and asset allocation for you. 

Once set up, you simply tell the robo-advisor how much to invest and on what schedule, and it handles the rest. And by taking the human financial advisor out of the equation, these companies can offer low fees, so more of your money stays in your investment account. 

For example, Betterment's fee is just 0.25% of your account value for its Digital Investing plan and 0.40% for its Premium Investing plan. Wealthfront charges a 0.25% fee for all funds it manages. A financial advisor can cost up to 1% of your account balance. 

Investing in retirement accounts

An alternative to investing in the stock market directly is to invest your $1,000 into a retirement account. Many employers offer 401(k) retirement accounts, which are funded directly through your pre-tax income.

An individual retirement account (IRA), on the other hand, allows you to invest your pre-or post-tax $1,000. Plus, an IRA has distinct future tax advantages a 401(k) can't match. 

There are two key IRA types — traditional and Roth — and they both grow through various investments, including stocks, corporate bonds, private equity and others. 

In 2021, these IRAs also share a $6,000-per-year contribution cap, meaning you can only contribute a combined $6,000 per year to both types of IRAs. This cap jumps to $7,000 for those over 50 years old. 

While they are similar in these ways, each has its own advantages and disadvantages. 

Traditional IRA

A traditional IRA allows you to contribute pre- or post-tax dollars, but the amount you invest may be tax-deductible, meaning you may be able to deduct your $1,000 investment from your income at tax time. Also, your account's growth is tax-deferred, so you pay no taxes on the account's growth. Instead, you may pay taxes on the withdrawals you make. 

The downside to a traditional IRA is that you must start withdrawing from it at age 72. You may be subject to a 10% penalty tax if you withdraw money before reaching 59 1/2 years old and there are income limitations on the tax deductions. 

The 2021 deduction caps, which vary by whether or not your employer offers a retirement plan, your filing status and your modified adjusted gross income (MAGI), are as follows. 

Covered by a retirement plan at work

Single tax filers

  • MAGI of $66,000 or less: Full deduction 

  • MAGI of $66,001 through $75,999: Partial deduction

  • MAGI of $76,000 or more: No deduction

Married filing jointly

  • MAGI of $105,000 or less: Full deduction 

  • MAGI of $105,001 through $124,999: Partial deduction

  • MAGI of $125,000 or more: No deduction

Married filing separately

  • MAGI of less than $10,000: Partial deduction

  • MAGI of $10,000 or more: No deduction

Not covered by a retirement plan at work

Single tax filers, head of household or qualifying widow

  • MAGI of $66,000 or less: Full deduction 

  • MAGI of $66,001 through $75,999: Partial deduction

  • MAGI of $76,000 or more: No deduction

Married filing jointly

  • MAGI of $198,000 or less: Full deduction 

  • MAGI of $198,001 through $207,999: Partial deduction

  • MAGI of $208,000 or more: No deduction

Married filing separately, and spouse isn't covered by a retirement plan at work

  • MAGI of $198,000 or less: Full deduction 

  • MAGI of $198,001 through $207,999: Partial deduction

  • MAGI of $208,000 or more: No deduction

Married filing separately, and spouse is covered by a retirement plan at work

  • MAGI of less than $10,000: Partial deduction

  • MAGI of $10,000 or more: No deduction

If you fall into a category that allows a partial deduction, you can use Fidelity's IRA contribution calculator to determine how much of your contribution is tax-deductible.

Roth IRA

A Roth IRA is another retirement vehicle but you contribute only post-tax dollars, meaning you can't deduct your $1,000 contribution from your income when you file your taxes.

If you opt for a Roth IRA, your investment grows tax-free. Plus, after five years, or when you reach 59 1/2 years old, you can withdraw cash from your IRA tax-free. Also, there is no requirement to make withdrawals at any particular age. 

The downsides to the Roth IRA are its lack of immediate tax benefits and its income-based contribution limits. 

The 2021 contribution limits are as follows:

Single tax filers

  • MAGI of less than $125,000: $6,000

  • MAGI of $125,000 through $139,999: Partial contribution

  • MAGI of $140,000 or more: Not eligible for a Roth IRA

Married filing jointly

  • MAGI of less than $198,000: $6,000

  • MAGI of $198,000 through $207,999: Partial contribution

  • MAGI of $208,000 or more: Not eligible for a Roth IRA

Married filing separately

  • MAGI of less than $10,000: Partial contribution

  • MAGI of $10,000 or more: Not eligible for a Roth IRA

If you fall into a category that allows a partial contribution, you can use an IRA contribution calculator to determine how much you can add to your IRA per year.

Depositing it in a savings account

Investing money doesn’t have to include risk, and this is where a high-yield savings account can help. These accounts can be your regular old savings accounts, money market or a certificate of deposit (CD). They not only pay you interest, but they're all FDIC-insured, so you know you won't lose all your money if something happens to the financial institution. 

High-yield savings account

High-yield savings accounts have distinct benefits, as they allow the account holder to access the cash. Account holders can make up to six transactions per month from their savings account, so they can move money into their checking account or withdraw cash from the bank if needed. After the sixth transaction,  the bank is legally required to charge a fee. 

A high-yield savings account is also federally insured, so you're guaranteed never to lose the original $1,000 you deposited. 

The downside to a high-yield savings account is it offers very low returns. On average, a savings account will pay 0.06% annual percentage yield (APY), though they can go as high as 1.15% APY. Also, a savings account will not include a debit card, meaning you can only make withdrawals through a teller at the bank. 

Money market account (MMA)

An MMA is similar to a savings account in that you have access to the cash you invested, but some also have check-writing capabilities and a debit card. An MMA also typically has a slightly higher interest rate, as the average APY is 0.08%. MMAs have shown maximum interest rates of 1.5%, beating the savings accounts by a wide margin. 

Like a savings account, though, an MMA is limited to just six transactions per month. Plus, they may have monthly maintenance fees and minimum balance requirements. 

Certificate of deposit (CD) account

A CD account is another insured investment account you can get through your bank, but it generally offers a far higher interest rate than a savings account or MMA. Depending on the length of the CD, you can expect an average APY of 0.14% to 0.55%. In some cases, the interest rate can exceed 1% on longer-term CDs.

The downside to a CD is you must commit to leaving your money untouched in the account for a fixed period — typically one to five years. If you withdraw cash from the CD, you'll forfeit a portion of the interest you've earned and possibly incur other early withdrawal fees. 

Investing in real estate

You don't need to be a billionaire to get into real estate investment. This is where real estate investment trusts (REITs) come into play. REITs are companies that own, operate or finance real estate that produces income. They raise capital through private investors. 

When you invest your $1,000 into a REIT, you’re investing in real estate ventures, be it an office building in New York City or a small apartment building in Montana. As the REIT earns income, it pays dividends to its investors. 

REITs must pay at least 90% of their taxable income to shareholders (investors), but most pay 100% of their taxable income to investors. 

Companies like Fundrise allow investors to get into real estate with minimum investments as low as $1,000. So, even with very little money, you can get into the profitable and relatively stable world of real estate investment

One downside to REITs is that they aren't short-term investments. Sure, you can make a quick buck during real estate booms, but the strongest returns often come at the 20-year mark and beyond. The other downside is if the country enters a recession and property values fall, your investment returns can decline dramatically. 

Investing in peer-to-peer lending

You can invest your $1,000 into people too. More specifically, lending money to people in need of funds through various peer-to-peer lending sites like Peerform or Prosper. These lenders use crowdfunding to give borrowers the money they need, whether it's to consolidate high-interest credit card debt, remodel their home or reach their financial goals. 

This investment strategy can be quite profitable in some cases, as it can deliver up to 12% annual returns. Many of them also allow you to fund only small portions of loans, helping you create a more diversified portfolio. Plus, all the borrowers are screened and go through a credit check. 

There are some downsides to using this investing strategy. First, if a loan defaults due to nonpayment, you may lose 100% of your investment, and there's no FDIC insurance to protect you. Second, while most investments will grow exponentially faster each year thanks to compound interest, peer-to-peer lending goes in reverse. The borrowers pay less in interest charges as the account ages. Finally, unlike the stock market, where you can sell stocks as you like, liquidating a peer-to-peer loan is limited and generally not profitable.

Watching your $1,000 grow

When determining how to invest $1,000, there's no shortage of options. From investing in the stock market to investing in peer-to-peer loans, there is an option for everyone. For some investors, the best option may be a mixture of a few. 

No matter which investment option — or options — you choose, it’s important to invest as early as possible. The sooner you invest your $1,000, the quicker you can take advantage of compound interest. The only exception to this compounding growth is peer-to-peer lending, which yields reduced payouts as the investment ages. 

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