This post was originally published on this site
https://content.fortune.com/wp-content/uploads/2022/12/Recommends_how_to_invest_1000.jpg
When you come into an unexpected $1,000 windfall, whether through a bonus, gift, or for any other reason, it can be tempting to just spend the cash. But you may want to consider other options including investing to maximize the value of the money over the long term.
Wealth advisors say there are many ways to make the most of $1,000 if you choose to invest, including short and long-term options that can put the money to work for you.
How to invest $1,000
For many types of investments, you don’t need a great deal to get started—meaning even with $1,000 there are several possibilities. The options include contributing to individual retirement accounts (IRAs), investing in the stock market through a traditional brokerage account or robo-advisor, and even squirreling the money away in a high-yield savings account.
“$1000 can go toward a lot of things—paying off debt, saving for a rainy day, or stepping into the market. We believe that investments matter, but it’s how you’re invested that matters more,” says Heather Winston, certified financial planner, CWS, and director of product, advice, and planning at Principal Financial Group.
Save for retirement
If you’re looking to invest $1,000 with perhaps mid- and long-term goals in mind, an IRA can provide a great deal of value. The most common options are traditional and Roth IRAs, which allow you to prepare for retirement and have various tax benefits.
“Funds deposited in a traditional IRA can be deducted from one’s gross income the year in which they are contributed,” says Andrew Crowell, financial advisor and vice chairman of wealth management at D.A. Davidson. “Further, all earnings and capital gains that are achieved while the funds are in the IRA are free of annual taxes.”
Traditional IRA contributions are taxed only when they are withdrawn in retirement. The combination of a current year tax reduction coupled with years of tax-free compounding until withdrawal makes IRA contributions a compelling choice.
Roth contributions are funded with after-tax dollars and thus will not reduce your annual tax bill but once deposited the money is able to grow tax-free. And depending upon your age and financial circumstances, a Roth IRA may also offer tax advantages worth considering.
“Similar to traditional IRAs, funds in a Roth IRA are not subject to annual taxes on earnings and capital gains, and they have the added benefit of withdrawals in retirement being tax-free,” says Crowell. “Further, there are no required minimum distributions (RMDs) from Roth IRAs, which allows those funds to compound even longer.”
The money contributed to an IRA can be invested in various assets such as stocks, bonds, mutual funds, and ETFs. Self-directed IRAs allow you to control the investment choices while others have a predetermined set of investment options. No matter which type you choose, the annual returns from IRAs can be advantageous.
“These accounts allow you to grow your wealth and curb inflationary impacts, which is a key consideration in the current economic environment,” says Winston. “This is a great way to save for your future self. You can assume, on average, a 6% to 7% rate of return in a well-diversified [IRA] investment portfolio over your lifetime.”
Invest in the stock market
The stock market also offers a variety of options for investing $1,000, which can be done through a traditional brokerage account. These accounts provide various investment options but can also come with higher risks depending on the types of investments you choose.
“Traditional brokerage accounts typically offer a wide array of investment options,” says Crowell. “The range of investments and flexibility these accounts offer make them attractive.”
This includes exchange-traded funds or ETFs, which are an asset that packages a mix of securities, often stocks or bonds. ETFs are typically designed to track a specific index, such as the S&P 500.
“EFTs offer investors diversification while still allowing for the targeting of certain sectors and investment styles,” says Crowell. “Unlike mutual funds, which trade once daily after financial markets close, ETFs trade during market hours just like stocks of individual companies. As such, ETFs allow an investor to time their purchase or sale to take advantage of extreme market moves either up or down.”
For those who don’t want to start smaller, fractional shares allow for buying small portions of a stock. For example, if a company’s stock trades at $1,500 per share, which would make it impossible to purchase even one share, you could instead purchase a fractional share of that stock.
“Fractional shares would allow this same investor [who has $1,000] the ability to purchase fractional shares across a number of companies,” says Crowell.
Finally, if you’d like to take an entirely hands-off approach with your $1,000 investment, robo- advisors are another choice. These types of platforms do all of the investing for you based on your short- and long-term goals and financial objectives.
Stash it in a deposit account with a high APY
Admittedly not an investment, but for those who want their money to earn interest without taking on any risk, a high-yield savings account is a very safe choice. The marketplace of high-yield savings accounts has proliferated in recent years and there are countless options, particularly from online-only banks and financial institutions, that offer extremely competitive interest rates—some as high as 4% or more.
If you don’t mind your money being locked away for several months or years, certificates of deposit (CDs) are another type of deposit account that offers extremely generous interest. Some online-only banks offer CD rates as high as 4.75% or more.
Another option: Pay off debt or build up your emergency fund
Paying off debt or adding money to your emergency fund is not an investment option either, but can sometimes be more beneficial given your current circumstances.
“In financial planning, we have to expect the unexpected,” says Winston. “That means setting aside money for those surprise expenses or unavoidable life events should be a top priority.”
The rule of thumb is to have three to six months’ worth of living expenses available in savings, so tucking away $1,000 to build up your emergency fund will always be a solid decision. Just make sure to keep your emergency fund in an account that’s accessible and liquid so that you are able to pull from it when you need it the most.
Paying down debt meanwhile, can provide you with financial freedom. Particularly in today’s high-interest rate environment—where debt can quickly spiral out of control— paying off debt is an investment in your financial future.
