Before you begin to save, analyze what it’s costing you to carry the debts you already have, and consider how rapidly you might discharge those. After all, high-interest credit cards can carry rates of 20% or more, and some student loans have interest rates over 10%. Those rates far eclipse the average annual earnings of 7% or so that the U.S. stock market has returned over time.
If you’re carrying a lot of high-interest debt, it makes more sense to pay off at least some of it before you make investments. While you cannot predict the exact return on most of your investments, you can be certain that retiring debt with a 20% interest rate one year early is as good as earning a 20% return on your money.
How to Invest $500
It may seem like a small amount to work with, but $500 can go farther than you might think in starting an investment portfolio. If you prefer to play it safe, park your sum in a certificate of deposit (CD) from a bank or other lender or use it to buy short-term Treasury bills, which can be purchased through an online broker. The growth potential with both options is limited, but the risks are virtually zero. It’s a way to earn a little on your money until your nest egg grows to the point where other options are available.
For those who are comfortable with a little more risk, many choices are available, even for small investors, that promise greater returns than CDs or T-bills. One is a dividend reinvestment plan (DRIP). You buy shares of stock, and your dividends are automatically used to purchase additional shares or even fractional shares. This is a great choice for small investors because the shares are purchased at a discount and without paying a sales commission to a broker. Buying a single share of a company’s stock will get you started.
Another option for starting small is an exchange-traded fund (ETF), most of which require no minimum investment. Unlike most mutual funds, ETFs typically feature a passive management structure, which translates to lower ongoing costs. However, among other drawbacks to ETFs, you must pay fees on their transactions. To lessen these charges, consider using a discount broker that does not charge a commission or plans to invest less often, perhaps investing larger amounts quarterly rather than making small monthly purchases.
Toward the top of the risk continuum, there’s investing in peer-to-peer lending. Crowdfunders connect investors with money to lend and entrepreneurs trying to fund new ventures. As the loans are repaid, investors receive a share of the interest in proportion to the amount they have invested. Some crowdfunding platforms have high minimums to open an account, such as the $1,000 one for Lending Club, but you can get started with others, such as Prosper, for as little as $25.
Crowdfunding offers high risk, as many new ventures fail, but also the prospect of higher earnings. Generally, annual returns fall in the 5% to 8% range, but they can climb to 30% or more for investors who are willing to take a big risk or are simply lucky enough to back an especially profitable newcomer.