Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
You got your hands on $1,000. Great! Unless you got it through less-than-legitimate means and are currently on the lam, give yourself a huge pat on the back. Saving any amount of money isn’t easy and having $1,000 is no small feat. Now it’s time to figure out what to do with it and how to start investing. In this article, we offer some investing options to help you determine how to invest $1,000.
Before you think about investing that $1,000
Before you start worrying about ETFs, mutual funds, or high-yield savings accounts, your first steps are to protect yourself by paying off credit card debt and building your emergency fund.
First, if you have any loans or credit cards with balances, clear off that debt first. We recommend putting as much of your $1,000 towards the debt as necessary until it’s clear.
Second, once your credit card debt is clear, turn your attention toward an emergency fund. An emergency fund is a sum of money put aside as liquid cash for financial emergencies, such as a job loss, sudden illness, or big home expense. Most financial experts recommend that individuals or families keep three to six months of expenses in a cash-equivalent account. This will reduce your likelihood of taking on debt in the future.
We know those aren’t the most exciting answers, but they are the most sensible. If you’ve got those things taken care of, then you can get busy investing. Here’s how to invest $1,000.
The best ways to invest $1,000
There are infinite ways to start investing (alpacas, anyone?) Investments are not one-size-fits-all, so without knowing your specific situation, it’s hard to tell you precisely how to invest your $1,000 dollars.
Investments are speculative and past results should never be understood as predictors of future performance. That being said, there are some investment options that are right for most people to get started investing.
1. Contribute to a high-yield savings account
Contributing to a high-yield savings account is the simplest way to invest your $1,000. It may not seem like much of an investment at all (especially when interest rates hover around 1%), but these accounts are useful tools if you need to keep your cash liquid (such as your emergency fund). With a savings account, you can access your money instantly when something comes up without using a credit card and paying their expense interest rates.
Keep in mind that a high-yield account is not the same as a traditional savings account you get from your local bank. Your local bank will only offer a fraction of a percent in interest and will likely require you to open a checking account as well.
2. Open a tax-advantaged account
Don’t underestimate the power of choosing the right investment account to store your $1,000. Taxes are like investment termites—they’ll chew clear through your investment if you let them.
You should do anything you legally can to lower your tax bill. The government has actually created tax breaks to incentivize citizens to save for retirement and other big life expenses. A lot can be saved by investing the maximum possible into what are known as “tax-advantaged” accounts. These investment vehicles either allow investments to grow within them tax-free or only become taxable when you withdraw money years down the line in retirement. Provided the time horizon on these accounts fits with your goals, grab as much of the “free money” as you can by maxing out these accounts first.
Think of tax-advantaged accounts as the top cups in those cool champagne towers. Only after the top cups get filled should your money trickle down into other types of accounts. If you don’t need your money right away, you should have no trouble at all investing your entire $1,000 into a tax advantaged account.
Open an RRSP and/or open a TFSA, both of which offer tax benefits that you should avail yourself of before investing in non-tax advantaged accounts. Which one? Well, it really depends.
TFSAs are great for two types of investors: Those who don’t earn huge salaries and/or those who plan to do something with the investment before retiring, because unlike RRSPs, you won’t pay tax if you take the money out pre-retirement.
RRSPs are a better idea for people who are making more now than they anticipate they’ll make in retirement since they’ll be taxed at a lower rate when they withdraw the funds down the line than they would now. Though RRSPs have a reputation for being impossible to crack open pre-retirement without huge tax penalties, there are ways to spend the money and not get killed by the CRA. If you want to finance a down payment on a house or fund yours or your spouse’s education you can take an interest-free loan from your RRSP.
If you want some or all of your $1,000 to be used to fund a child’s university education, consider opening a RESP. RESPs are beneficial for three reasons. First, the money grows within them tax-free. Also, it isn’t considered taxable income when it’s withdrawn and spent on educational expenses. And best of all, thanks to a program called the Canadian Education Savings Grant (CESG), the government will match 20% of your contributions, up to a lifetime limit of more than $7,000 per child. Yup, the government is willing to give your kid the cash equivalent of a reliable, 10-year-old used car.
Personal investment account: If none of the tax-advantaged accounts suit your needs, you can always open a personal investment account. This is an account that allows you to buy and sell securities, stocks, and bonds but doesn’t come with the tax advantages of the other accounts.
3. Invest in ETFs
Exchange traded funds (ETFs) are a catch-all term to describe baskets of equities that can be traded on a stock exchange. (Telling someone your investing strategy is buying ETFs is a little like answering “food” when someone asks you to describe your diet.)
The great thing about ETFs is that since many of them invest your money in hundreds of equities, you’ll minimize risk by not putting all your eggs in one basket. And not only that, buying even one share in a company like Apple or Google is super expensive and may even be out of your $1,000 price range, but many ETFs will be both within your budget and contain affordable “slivers” of those stocks.
Some ETFs contain stocks and others bonds, and some feature real estate investments. You can purchase ETFs by opening an account with an investment provider and making trades. ETFs that seek to mimic much or all of the stock market are particularly valuable parts of a balanced portfolio, because if one sector is not performing well, it won’t drag down your entire investment.
There are many ETFs to choose from. Index ETFs mimic an index like the S&P 500, so for one price you can buy slivers of the 500 most valuable publicly traded companies in America. But one ETF does not make your portfolio diversified. You’ll need several different ETFs in order to achieve the kind of diversification that most financial advisors recommend. If the idea of putting together a balanced portfolio sounds about as challenging as performing microsurgery, you might be a good candidate for a robo-advisor, a company that specializes in putting together portfolios for people like yourself.
In order to invest in ETFs, you’ll need to open an account with a brokerage that allows ETF trading. This is kind of like a savings account because the earnings and interest will be taxed each year.
4. Invest with a robo-advisor
If the sound of buying stock, ETFs, or any other type of investment product sounds confusing, let alone trying to choose them yourself, automated investing might be a solid option to consider. Online investment platforms, often called robo-advisors, allow you to take a risk survey and build a portfolio to suit your investing goals. Rather than sweating the details, you can have a special portfolio built according to your risk tolerance and goals and get back to the truly important stuff in your life.
And though some robo-advisors have minimum dollar investments to join that may be higher than your $1,000, some of the best robo-advisors allow you to create an entire balanced portfolio of ETFs with just one dollar.
Although we’re biased, we reckon the absolute best way to invest $1,000 is with Wealthsimple. We offer state-of-the-art technology, low fees, and the kind of personalized, friendly service you might have not thought imaginable from an automated investing service. Get started or learn more about our portfolios.
5. Invest in stocks
Any discussion of how to invest money to make money fast would have to include stocks. If history is anything to go by, stocks have the potential to be quick investments. You just have to open a trading account, pick the right stocks, and your $1,000 can soar limitlessly. But that’s only if you make the right picks. Chances are you’ve heard stories about someone who invested $1,000 in Amazon in 1997 and now lives in a castle. What you don’t hear about as much, however, are the stories about some other guy who went all in on Snapchat and didn’t do so well.
Keep in mind, however, that stocks represent ownership in a business. Some businesses do well and others fail. Stock picking is extraordinarily hard. Famously rich stock picker Warren Buffett has spent the last decades discouraging pretty much everyone not named Warren Buffet from trying to make money picking individual stocks. In fact, he encouraged his heirs to invest the lion’s share of their inheritance in low-fee, highly diversified stock funds.
6. Invest in bonds
Bonds are another option for your nest egg. Bonds are almost like a loan agreement—essentially, one party gives another party money with the understanding it will be paid back in the future with interest. There are many types of bonds, from government bonds to municipal bonds.
Bonds are typically seen as a less risky investment when compared to something like stocks. As a result, many investors have some of their investments in bonds. Investing some of your money in bonds could be seen to counteract the volatility of the stock market. While getting into the nitty-gritty of bonds is not for the faint-hearted, investing in them is a little easier. Bonds can be bought directly from the government, via discount brokerages, or online as part of an investment portfolio offered by investment platforms.
Government bonds typically come with less risk, but also provide comparatively low returns. Stocks behave a little like a penny tossed in the air; the more times you do it, the more likely it is you’ll get to a one-to-one heads-to-tails ratio, and the longer you hold a stock, the more predictable the results will be. The range of outcomes tends to narrow over time, so in the past, those who held onto a variety of stock investments for more than a decade were most likely rewarded with returns that offset any short-term risk.
The conventional wisdom is: The longer your investment horizon, the higher the ratio of stocks to bonds your portfolio can contain. If you don’t need to withdraw money in the short term, you can afford to ride the wave of the stock market.
7. Invest in real estate
Watch enough cable TV, and you’ll assume that anyone with a tape measure and a barrel of hair gel can make millions flipping real estate. In reality, it’s a business with huge risks that have been known to ruin unwise speculators. $1,000 may not be enough to cover a down payment on a house or apartment, but there is one way to benefit from the real estate market without having to actually buy property: Real estate investment trusts, or REITs, are companies that sell shares in their various real estate investments. Real estate may be a part of some investment portfolios created by robo-advisors.
Factors that dictate how to invest $1,000
Before you get started using any of those methods, you’ll want to assess three important factors that will dictate your next move before you start investing your $1,000. If you want to invest and make money, you have to understand these principles first.
Goals and time horizon
The first step is understanding what you intend to do with this significant pile of cash. Is this $1,000 the money you hope to be your first big push towards keeping the lights on, the cat fed, and the fridge stocked during your retirement in thirty years? Or is this the miracle inheritance from Aunt Beatrice that you’re going to use to put towards a down payment on a bigger apartment so you no longer have to live in a place where the bathtub’s in the kitchen?
Goals refers to what you intend to do with the money and time horizon is how long you intend to hold a particular investment. In general, a person who’s going to need the money within five years will probably want to avoid investing heavily in equities (aka stocks). Generally, stocks fluctuate in value much more than other investments such as government-backed bonds. If you need your money in the short term, the last thing you want to do is to withdraw it all when the market is down.
Circumstances and risk tolerance
Circumstance refers to how much money you have now—and how much money you anticipate you’ll be getting in the future, via factors like inheritance. Money can be liberating—if you feel like you’ll have a cushion to depend on should your investments be momentarily down, you might allow yourself to be more aggressive in your strategy.
Along with the time horizon, your circumstances will directly affect your risk tolerance, a term that simply means how much of your investment you can afford to lose. If your $1,000 vanished suddenly and your life wouldn’t be materially affected in any way, you have an incredibly high-risk tolerance. If without your $1,000 you won’t be able to come up with next month’s mortgage payment, your risk tolerance is extremely low. In a situation like the latter, you’d want to put the entirety of your $1,000 somewhere incredibly safe, a cash equivalent that throws off some interest, like a savings investment account.
If you’re scratching your head wondering how all this applies to your investing strategy — it might be a good time to take a risk survey offered by many automated investing services. They’ll then build a personalized portfolio for you based on these factors and others.
Just like taxes, fees are like investment termites. Left unchecked, they’ll devour everything you value. If you can become a cold-hearted fee exterminator, you won’t believe how much money you’ll be able to save over the long term.
It’s not uncommon for an actively managed mutual fund to carry a 1% management expense ratio (MER). This means that every year, regardless of how well the fund performs, 1% of the entire fund will be deducted to pay salaries and expenses of everyone who works on the fund.
One or two percent might not sound like a huge sum, but one investment advisor showed that a fee of just 2% could decrease investment gains by half over the course of 25 years. Fiddle with a fee calculator to see how trading a 2% MER for a .5% one could affect a hypothetical $1,000 investment.
Hold on, you might be thinking. If mutual fund managers are super good at picking the best-performing stocks, their fees shouldn’t be a problem since the funds will be throwing off returns that far exceed those of the stock market as a whole. The problem is they’re not. Most studies show that professionals paid to pick stocks will fail to outperform the overall market over the long term.
So if active pickers can’t beat the stock market and still charge fees, what’s a better route? For most goals, time horizons, and risk tolerances a particularly effective way to get started investing is through passive investing. This can be done by using robo-advisor. Rather than attempting to beat the market, most robo-advisors attempt to mirror the market by investing your money in many different ETFs. That’s a job easily handled by a computer algorithm. Low fee passive portfolios of ETFs can be designed with any goal, time horizon, and risk tolerance in mind.
Frequently Asked Questions
In general, yes. Just make sure you choose an investment strategy that reflects your low investment amount. The sooner you start investing, the sooner you will be able to take advantage of compound interest.
There's no sure answer to this question. How much your $1,000 will be worth depends on the types of securities you purchase and their performance. As an example, $1,000 with a return of 7% over 20 years would equal $3,870, but that doesn’t include the cost of taxes or management fees. (7% is a reasonable assumption based on historical market growth. Between the years of 1950-2009, the stock market grew on average by 7% per year.)
When it comes to investment advice, there's a very good reason you often hear “past performance does not equal future results.” It's because past performance absolutely does not equal future results. But if you're disciplined, your risk is minimized through a highly diversified portfolio, and if fees are kept low, you might be very happy with what your $1,000 grows into in the long term.
If you can’t risk any fluctuation, you’ll be better served with a savings account or a savings product that typically carries virtually little to no risk. That said, you can't expect the kind of returns you might get from investing in ETFs made up of stocks, bonds, and real estate.
If safety is what you need then you will need to look for low-risk investments, though you should know that there are no guarantees in investing. Stocks, being naturally risky, will fluctuate in value. In exchange for taking on this risk, investors will generally be rewarded with the possibility of higher returns than they'd get from less risky investments.
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