Having a lot of money can be great and open up a lot of doors to investing. As the popular saying goes, money breeds money. However, what do you do if you do not have a whole lot of cash in your bank account? Say, you have only $1,000 to invest. What are the things you can do with this money that are productive and can generate you a good return on your investment?
Many brokers and people may leave you convinced that you need a large sum of money to start investing. However, as we will see in this article, this is not the case. There are actually a lot of things you can do to invest a thousand dollars productively. Let’s take a look at the 6 smart ways you can invest your $1,000 to earn a nice return.
#1. Pay Down High-Interest Rate Debt
The safest and potentially high-interest bearing way of investing your $1,000 is to simply pay down high-interest-rate debt that you may have. This debt usually is credit card debt and can have an interest rate somewhere in double digits. Why would you want to pay down such debt first and foremost? Because your savings would basically be your return on investment. That is if the interest rate on your credit card is 15%, then you would earn a risk-free return of 15% on your $1,000 investment. Who would not want to earn 15% in the current low-interest-rate environment?
However, not all debt should be repaid. In many instances, long term debt such as mortgages, student debt should not be prioritized. Why? Because the interest rate on such debt is usually less than what you could earn by investing somewhere else. Say you have student debt that bears a 3% interest rate annually. You can definitely find an investment that will generate you more than 3%, so it is not worth investing in repaying such low-interest bearing debt in the first place. Instead, you should look into investing in one of the next following things on this list.
#2. Invest in an ETF or an Index Fund
Exchange-traded funds and index funds are a great way of investing your $1,000 efficiently. These funds usually have the advantage of being very transparent investments. You are usually able to understand everything you need to know about the fund in just a few paragraphs. That includes the holdings, any commissions, and similar things.
Index funds are a passive way of investing since they basically track major stock indices such as the S&P 500 index. You would get exposure to the stocks within the S&P 500 index if you invested in such an index fund. Conversely, exchange-traded funds are a more active form of investment. You either invest 100% of your $1,000 in a specific ETF or split your investment into parts, according to the risk profile of that investment.
There are a number of ways you can split the $1,000 you are willing to invest in exchange-traded funds. For instance, if you are a risk-tolerant investor, you could split your investments into 50% of a growth-oriented ETF, 25% into medium risk ETF, and 25% into a bond ETF. If you are more risk-averse or nearing retirement, you would probably want to allocate more towards lower risk ETFs and bond ETFs.
#3. Invest in Safe Bonds
Another way of investing your $1,000 if you are a risk-averse investor or are nearing retirement is to invest in safe bonds. Treasury bonds can be a much safer investment than, say bond ETFs. However, Treasuries also pay a smaller return on investment. Another investment of choice might be safe company bonds of large multinationals or large caps, however, they require more research and are riskier than safe government bonds. Additionally, many safe government bonds have tax benefits that you can take advantage of.
That said, however, in the current economic climate and a low-interest-rate environment, bonds have lost a lot of attractiveness. If you are in Germany, you would actually be paying the government for lending them money, rather than receiving interest on it. It is many times wiser to invest in stocks that pay a nice dividend and are stable large companies. Which brings us to our next way of investing your $1,000.
#4. Invest in a Single Stock
If you currently wanted to invest in a single Berkshire Hathaway stock, you would have to invest quite a nice sum of money, totalling over $300,000. Other stocks also do not sell cheap, and it is probably best to stay away from penny stocks if you are a beginner investor, for diversification purposes. So, it is quite hard to diversify your stock holdings if you only have $1,000 to invest. Nonetheless, it can be quite an attractive investment if you time the market right with a stock that you research well, and see growth opportunities in.
For instance, there were several times in the last five years where an investment in large companies such as Apple, Facebook, or Google would have doubled your investment. Of course, such an investment can also incur you a loss or make you a smaller return than an ETF that includes the aforementioned stocks in the mix. The key here is to know how capable you are of researching stocks on your own and picking winners (or at least a single winner). If you are prepared or determined to learn the ropes, by all means, go for it.
#5. Trade Forex
Trading Forex (foreign exchange or currencies) is probably the riskiest way of investing your $1,000 out of all the 6 ways to invest. It can be the least smart way of investing your money if you do not know what you are doing, or it can be the smartest way if you do. Forex can help you gain significant returns, or it can “help” you burn your account in a matter of days, or sometimes even minutes if you are not careful. So, it is a good idea to start very small (small position sizes) or start with a demo account instead of a real money account.
Many professional Forex traders who have a great track record have lost their fortunes trying out strategies and just starting out in Forex. Keep that in mind if you are just starting out, and make sure you consider the next smart investment on our list before you go live.
#6. Invest in Your Education
If you are a beginner investor, you will probably find that investing in your own education is the best, safest and highest return generating investment out of all the 6 ways you could spend your $1,000 on our list. If you do not know what you are doing and have no debt, in many cases it will be the smartest of choices of how you could invest $1,000.
A great way to learn and invest in your education is to take on courses that help you learn the ropes as a beginner investor.
In this article, we have offered 6 smart ways how you can invest a thousand dollars and potentially earn a good return on investment. The best way for you will depend on your individual situation and will be different for different people. Younger people will prefer riskier ways to invest as they do not have to fear to lose a thousand dollars since they can earn it back pretty quickly. However, those nearing retirement will probably want to save more carefully and choose less risky investments, such as bonds, bond ETFs or paying down their loans, if any. Be sure that you know what you are doing before choosing an investment and don’t forget to invest in your education in the long run.