Not knowing how to invest $1,000 is a good problem to have. After all, you have extra money to earn passive income instead of paying bills. And, $1,000 is enough to build a small, but diversified portfolio.
When it comes to investing, one of the most common questions I receive is How do I invest? Where should I invest? and How much should I invest?
My answer is always similar: It depends.
There are so many wonderful options out there. From ETFs to real estate, from savings accounts to peer-to-peer lending, you have many options when it comes to investing your next $1,000.
And most importantly, you do not have to be an expert. You just need to know where to get started.
1. Index Funds: (Maybe) The Best Way to Invest $1,000
Investing in the stock market can be your best option for how to invest $1,000. One reason is that the stock market is highly liquid. It’s easy to buy or sell shares when the market’s open. Some of the other suggestions require a five-year investment commitment.
There are two different styles of investing:
- Active Investing: You try to outperform the market
- Passive Investing: You invest to match the overall market’s performance
Index funds fall into the passive investing category. Since you only try to match the performance of the market, fund expenses are lower than active funds. The less money you pay in fees, the more money you can invest in the market.
If you’re new to investing, index funds should be your first investment. In fact, you might decide to invest all $1,000 into index funds.
For many investors, index funds are the only thing they invest in. Not to sound cliche, but here are two reasons why:
- Index funds are the cheapest way to invest in stocks and bonds
- Zero investing skill is required
For these two reasons, index funds are Warren Buffett’s favorite investment idea for DIY investors (like you and me).
Most people don’t have the time, skill, or desire to research and pick individual stocks. Even many professional investors don’t “beat” the market on a regular basis. So, the best option for most investors is investing in index funds.
What Do Index Funds Invest In?
With index funds, you invest in hundreds (or thousands) of companies with each dollar you invest. So, investing in an S&P 500 index fund lets you invest in the 500 stocks that compose the S&P 500 index.
When you only have $1,000 to invest, you can only afford to buy individual shares of a few companies. And, you can’t even buy a single share of Amazon stock which currently trades above $1,500 per share.
Being able to own small positions of many companies lets you capture the total market return of the index you track. There’s an index fund for nearly any index include the S&P 500, Russell 2000 small-cap companies, and developed foreign countries. And, your portfolio is less volatile than only investing in a few individual stocks.
How to Invest in Index Funds
With your 401k, you can invest in index mutual funds. For your personal accounts, a better option can be index ETFs. Most index ETFs have lower fund expenses than mutual funds.
If you’re a DIY investor, you might try investing in an S&P 500 index fund. This fund tracks the performance of the 500 largest stocks on the U.S. stock exchange. You get exposure to nearly every market sector. And, many of these companies also do business overseas. So, you can indirectly invest in internationally with a domestic company.
To diversify you should invest in funds that focus on different sizes of companies. Some of the different index fund sectors to consider include:
- S&P 500
- Large-Cap Stocks
- Mid-Cap Stocks
- Small-Cap Stocks
- International Developed Market Stocks
- International Emerging Market Stocks
- Government Bonds
- Corporate Bonds
If this is your first investment, focus on the S&P 500 and Large-Cap index funds first. These funds invest in some of the largest companies on the planet like Apple, Amazon, and Microsoft. Although these companies don’t have the most income upside like small fast-growth companies, they are less volatile. Minimal volatility means you’re more likely to earn steady profits.
If you are looking for hands-off investing, start with Betterment. Betterment has extremely low fees (0.25% – 0.40% of account balance per year) and offers up to one year free management. Get started with Betterment here.
A Quick Word About Target Date Funds
A third option is investing in target date funds. With these funds, you choose the fund nearest your retirement date. The fund automatically invests in a basket of stock and bond ETFs. This is the least time-consuming way to invest. But, perform your due diligence as some target date funds have high fund expenses. And, some under-perform their benchmark.
Target date funds are a good option if it’s the difference between investing and not. But, you might consider mirroring their portfolio allocation. It takes a few extra minutes, but you can avoid fund fees that reduce your total returns.
Did you know you can invest your spare change into index ETFs? Every time a payment is made on your debit or credit card, the Acorns app will round up to the nearest dollar and invest your change for you. Acorns Full Review
Betterment is a robo-advisor that handles all the investment decisions for you. They automatically invest your cash into a basket of stock and bond index ETFs. And, they also rebalance your portfolio for free. As you near retirement, Betterment shifts your asset allocation to hold more bonds and fewer stocks.
What we like about Betterment is that they invest your cash in 11 different stock and bond index ETFs. In other orders, every dollar you invest in instantly diversified. The exact asset allocation depends on your age and investing goals. Each one invests in large and small companies to get exposure to the entire stock market.
Plus, Betterment lets you trade partial shares of each index ETF. If you buy each index ETF in a regular brokerage like Vanguard, you have to buy full shares. When you only have a small amount of cash to invest, it’s hard to build a diversified portfolio. With Betterment, each investment only needs to be at least $1. Even though it’s only a few pennies, you own partial shares in multiple index funds with every investment. Betterment Review
Many people have a love-hate relationship with their 401k plan. They love the employer match for the free investing money. But, they hate the plan fees and lousy investing options.
With Blooom, you can optimize your 401k, 401a, 403b, 457, or TSP investments. They perform a free portfolio checkup. Then, they choose the best funds in your plan to meet your investing goals. Bloom also makes sure you have the right stock and bond asset mix too. Blooom Review
2. Individual Stocks and Sector ETFs
Once you build a firm foundation of index funds, you can start investing in stocks and sector ETFs. If you’re a DIY investor, this can also be an exciting way to invest in promising companies to boost your earning potential.
With stocks, you’re a direct shareholder for each company you invest in. As long as the share price is below $1,000, you can buy at least one share. Minus Amazon and a few other companies, most individual shares trade for less than $1,000 each.
Investing Hack: Did you know you can actually buy partial shares of any stock with M1 Finance? M1 Finance also has free trades and allows you to invest in Stocks, ETFs, and even fractional shares.
And with sector ETFs, you invest in companies for a certain industry. While there’s an ETF for just about any sector or commodity, some sector ETFs include:
- Consumer Staples
- Health Care
- Real Estate
Sector ETFs have higher fund expenses than index funds, but they are still a cheaper way to invest in many companies with one investment. Since you’re still investing in multiple companies, they are more diversified than owning individual stocks.
To keep a manageable portfolio, you might wish to only hold up to 10 individual stocks and sector ETFs in addition to your index funds. These holdings can be more volatile than index funds so you need to watch them more closely. Your first $1,000 investment might only be enough to buy one or two investments, but it’s a start.
Enjoy Unlimited Free Trades With M1 Finance
To trade any stock, sector ETF, or index ETF for free, invest with M1 Finance.
You can also buy partial shares of any stock or ETF. So, you can instantly diversify your portfolio. The cost savings by not having to pay $4.95 per trade adds up quickly.
M1 requires a $100 initial deposit for taxable accounts. For your retirement account, you must deposit $500 to start investing.
Be a DIY Investor with Ally Invest
One of the best online brokers for DIY investors is Ally Invest. They have many commission-free sector ETFs you can invest in for domestic and global stocks. These commission-free ETFs save your $4.95 each time you buy or sell shares. That’s more money you can use to invest.
You can also trade individual stocks and ETFs for $4.95 per trade. This is the average trade fee for stocks and ETFs, however it is still more expensive than M1 Finance’s zero fee and unlimited trades.
Investing Tip: Watch your investments grow tax-free when you open a Roth IRA.
3. Crowdfunded Real Estate
When you don’t need to touch your cash for at least five years, real estate investing in a great option.
You won’t experience the same roller coaster ride in share price values as investing in stocks or public REITs. Besides less volatility, you can earn annual returns that compete with the historic 7% annual return of the S&P 500.
Fundrise is a great start to crowdfunded real estate. They offer the lowest minimum investment of $500 and give you 90-day-money-back-guarantee on your investment. Historically, investors are returning 8.7% – 12.4% annually and they have a 4.98/5 rating from the BBB.
The most affordable way is to invest in crowdfunded real estate. With this suggestion, you directly invest in private real estate deals. Unlike the past, you don’t need large sums of cash to buy rental property or commercial real estate.
With real estate crowdfunding, you can start investing in multiple properties with $500 initial investment. If you go about real estate investing the regular way, you can easily expect to invest $50,000 or more to buy a single investment property.
Therefore, crowdfunded real estate allows you invest in deals that were only available to the rich a few years ago. And, you can start investing for less than $1,000.
To be clear, private real estate is highly illiquid.
Only invest money you don’t plan on using for the next five years. This is how long you must commit each investment before you can make penalty-free withdrawals for most private REITs.
If you can commit to the long-term investing time, you can earn potentially more income than public real estate stocks. For example, you can earn consistent returns between 8% and 12% in private real estate. With public real estate investments, you might earn a 4% annual dividend. But, your investment loses value if the share price drops in value more than the dividend payout.
Crowdfunded real estate relies more on the current job market quality, not earnings reports and other macroeconomic events.
Most crowdfunding platforms require a minimum $5,000 investment. And, you must be an accredited investor with $1 million in the bank or an annual income above $200,000. Chances are, you don’t meet either of these traits. If don’t, you still have a few ways to invest in crowdfunded real estate without being rich.
Arguably, the best crowdfunded platform for non-accredited investors is Fundrise. You only need to invest $500 to join Fundrise. Plus, they accept investors from every U.S. state.
If you already feel like you have a well-diversified stock portfolio, you can invest the full $1,000 in Fundrise. When your account balance reaches $1,000, you have more investment options. Some of these options have more long-term upside than the Starter Portfolio.
The one difference between Fundrise and accredited-only investing platforms is that you don’t invest in single projects. Sorry, but it’s federal law. Instead, non-accredited investors can only invest in private REITs. Think of them as a real estate ETF that invests in residential and commercial real estate projects.
If you like investing in real estate, you can also invest in public real estate stocks and REITs. Owning both helps you diversify your portfolio. And, you public REITs are highly liquid. If you need cash within the first five years, you can easily sell your investment.
They only require an initial $500 investment to join their Starter Portfolio. The Starter Portfolio splits your investment between debt and equity.
With debt investments, you earn quarterly dividends by lending money to the real estate developer. These investments are less risky, but you also have lower rewards.
Your equity investments are riskier and can produce higher returns. You invest in the actual equity of a project and become part-owner. With equity investments, you earn most of your profit from property appreciation when the project sells.
Until your account balance reaches $1,000, this is your only plan option.
Advanced Investing Plans
When you invest $1,000 right away, you can skip the starter plan and go straight to the advanced plans. If you have a starter plan, you can upgrade to an advanced plan when your balance reaches $1,000.
The three advanced investing plans:
- Supplemental Income (Dividend-focused with debt investments)
- Balanced Investing (Debt and Equity Investments)
- Long-Term Growth (Equity-focused investments)
Fundrise projects these advanced plans can earn between 8.2% and 10.5% annually. Of course, your returns can be higher or lower than these projections.
Another platform for non-accredited investors is Rich Uncles. You might like Rich Uncles if you want to invest in specific types of real estate. With Fundrise, you invest in both commercial and residential properties. Not every investor wants to invest in both types.
With Rich Uncles, you can invest in either commercial real estate or student housing. For commercial real estate, the minimum initial investment is $500.
The second investing option is a student housing REIT. Rich Uncles invests in college dorms that meet these criteria:
- 150-bed minimum capacity
- 90% rental occupancy rates
- Within a one-mile walking distance of a major NCAA Division I campus
You only have to invest $5 to open a position. The projected annual return is 6% for the student housing REIT.
4. Peer to Peer Investing
Are you looking for something that can produce stock market-like returns with less volatility? If so, try peer to peer investing.
Banks earn money by lending money to borrowers and collecting interest payments. From those interest payments, they pay you interest for your savings account and money market deposits.
While bank account interest rates are rising, you can still earn more by “being the bank.” With peer to peer investing, you skip the bank and lend directly to borrowers.
Lending Club offers an easy way to start investing in peer-to-peer lending. Investors buy notes corresponding to different loans, grades, and terms, then receive monthly principal and interest payments as borrowers pay off their loans.
As a result, your investment can earn between 3% and 8% annually. Each month, you receive a monthly interest payment that you can either reinvest or deposit into your savings account.
Depending on your investment horizon, you have two different peer lending options. Like crowdfunded real estate, your cash might be off-limits for up to five years.
The world’s largest peer lending platform is LendingClub. You invest in loans with a three or five-year repayment term. The minimum you can invest in each note is $25. Some of the different loan types you can invest in include:
- Credit Card Payoff
- Debt Consolidation
- Medical Debt
- Small Business
To start investing, you must invest the full $1,000 to open an account. This high initial investment helps you diversify in multiple loans. With a minimum per loan investment of $25, you can invest in 40 loans.
According to LendingClub, 99% of investors see a positive return when they own more than 100 notes. For this to happen, you need to invest $2,500. You can eventually scale to this account balance by investing new money monthly. Until then, you can invest your first $1,000 to start investing in peer to peer loans.
LendingClub Has Automated Investing
While you can manually invest in open loan requests, LendingClub also has an automated investing tool. This saves you time and helps you diversify your notes.
When you enroll in automated investing, LendingClub spreads your investment across loans with different credit ratings. You can earn more by investing in lower credit ratings, but the chance of default is higher.
Each month, you earn interest payments back from each borrower. If a note becomes past due and the borrower stops paying, you lose that investment. Loan defaults are unavoidable, that’s why it’s important to invest in as many as possible.
Another unique peer lending concept is StreetShares. You invest in small business loans for military veterans. And, you only need to invest $25 to open an account. So, you can invest a portion of your $1,000 in StreetShares and still have enough cash to invest in these other ideas.
The investing commitment is only 12 months for each investment. So, this peer lending option is most similar to a 12-year CD. Right now, StreetShares pays a 5% yield on every investment. The best 12-month bank CD yields are currently around 2.50% APY.
So, a $1,000 investment will earn $50 in interest before taxes. This can be a good alternative to bank CDs and other fixed income investments like bonds which have smaller potential yields.
5. Online Savings Accounts
If you still have a few decades until retirement, don’t park all your cash into an online savings account. Interest rates are finally becoming attractive again with interest rates near 2%. But, that’s still not enough to keep up with inflation.
You still need to keep a portion of your money in cash in a savings or money market account. Some experts recommend keeping 10% of your cash in a savings account. You have a hedge against unexpected market downturns. And, you have a reserve to buy investments at a lower price that you can sell high later.
Right now you can open a CIT Savings Builder account with $100 minimum deposit and an incredibly high 2.30% APR. Compare that with the “big banks” offering 0.05% APR, and the CIT Savings Builder has a 43x higher savings rate!
This is higher than the interest you might earn from your brokerage money market fund. As you need more cash to make future investments, you can easily transfer the cash to your broker.
Even if you don’t keep your investment cash in a Savings Builder account, it’s an excellent place for your regular savings. Maybe, you can find a new home for your sinking funds.
6. Your Own Business
Another unconventional idea is to invest in yourself. Too often, we focus on how we can invest our cash in other businesses to earn passive income.
How do you invest $1,000 into your own side hustle?
The answer depends on how you plan on making money.
Whether you are starting a side hustle or a business, you must have a website. Here’s a step-by-step guide to start your own website in less than 15 minutes.
Ideally, you will pick an idea that can earn recurring income even while you sleep. Or, the side hustle might eventually replace your current full-time income so you have a better quality of life. After all, time can be just as valuable as money.
If you’re willing to invest some “sweat equity” with your cash, many side hustles are nearly free to start. In today’s digital economy, online side hustles are the best way to earn passive income. To get your brain going, you might try some of these ideas out.
Start a Blog
You can start a blog and earn passive income from affiliate income. Like any investment, it takes time to earn passive income. For most bloggers, it takes a few months to build traffic and eventually make your first dollar.
What’s awesome about blogging is that you can post about anything you want. If writing isn’t your cup of tea, you can also make videos or creative designs too.
You might use a portion of your $1,000 to buy a website domain and to pay hosting fees.
Another option is dropship physical goods online. With this side hustle, you partner with a company and sell their products online. When a buyer makes a purchase, the shipping information is sent to the supplier. You make money and never touch the actual product you sell.
Dropshipping has some upfront costs. You must make a down payment for the inventory. But, you don’t have to find a place to store the goods you’re trying to sell. You only have to market the product and provide customer service to the buyer.
Get some tips from dropshipping pro Steve Chou in Money Peach Podcast Episode 56. He and his wife make more than $100,000 a year from their ecommerce store.
Create Digital Designs
Custom graphic design is another way to make money online. Some of your design options include:
- Book Covers
- Wall Art
You only need computer software to make designs that pay. If you have an older computer, you may need to upgrade to get the latest software.
With CafePress, you can also create an online store to sell items to all buyers. When your design sells, CafePress prints and ships the item for you. You only have to create eye-popping designs and they handle the rest of the selling process.
Become a Rideshare Driver
Maybe you’re a people person. You can also invest your $1,000 to be a rideshare driver. While you shouldn’t use all the cash to buy a new rideshare-friendly car, use part of the cash to start your ridesharing business.
Some of those expenses can include:
- Getting a new smartphone
- Performing necessary car repairs to pass the safety inspection
- Detailing your car to receive positive reviews from riders
7. Your Child’s College Education
Maybe you’re already on track with your investing goals. If so, you can start investing for your child. That might be starting a custodial account and investing in index funds.
Or, you can start saving for college with a 529 plan. These tax-advantaged plans are similar to your Roth IRA. You fund them with after-tax dollars, but your child can withdraw the earnings tax-free for educational expenses.
And, if you invest in your state’s 529 plan, you can minimize your state income tax bill too.
Learn more about investing for college with Abby Chao on the Money Peach Podcast.
FAQS on How to Invest $1,000
Only having $1,000 to invest might not seem like a lot of money. But, this $1,000 and even your first $100 investment put you on the path to financial freedom. Each person has different investing goals.
You might decide to only invest in one idea above. Or, you can diversify in several. These questions can help you make the best decision.
Are Index Funds or Individual Stocks Riskier?
In general, individual stocks are riskier because you’re less diversified. But, you also have more profit potential with most companies. The reason why individual stocks are riskier is that investment performance completely relies on one stock. With an index fund, you can earn dividends and share appreciation from many companies.
Also, if a stock has a sharp drop, the performance from the other stocks can minimize the downside potential. Nobody can fully predict which stocks will outperform the broad market and which ones will trail the market. To hedge against the unpredictable, broad market index funds are a popular option because you have less downside risk because your investment is more diversified across multiple sectors and company sizes.
Why Are Investing Fees So Important?
With any investment, you should try to pay as few investing fees possible. At first, paying $4.95 to buy stocks or investing in a sector ETF with a 1% fee doesn’t seem like a small amount of money. But, that’s a small fortune when you add up the expenses over your investing career.
The more money you pay in fees, the less money you have to invest. In turn, that means less passive income potential. And you either have to invest more cash or choose riskier investments to make up the difference.
Some of the fees you should pay attention to include:
- Fund Fees (Index Funds have the lowest fees of any mutual fund or ETF)
- Broker Trade Fees for stocks and ETF shares
- Platform Fees (Especially for crowdfunded real estate and peer to peer lending)
- Annual Taxes (Capital Gains vs. Ordinary Income)
A quick way to see if you’re paying too much in investing fees is to use Personal Capital. It’s a free app that compares your current holdings to the industry average fee. And, you can track your net worth and investing goals with Personal Capital too.
To reduce your annual tax burden, consider investing your $1,000 with an IRA. Under current tax law, you only have to pay taxes once on your contributions.
Is It Smart to Dollar Cost Average?
A popular investing method is dollar cost averaging. With dollar cost averaging, you invest small amounts of money each month, regardless of share price. This practice prevents you from trying to time the market.
How You Might Dollar Cost Average $1,000
When you have $1,000 to invest, you might decide to invest $100 a month for the next ten months. This strategy helps protect you from market volatility. And, it doesn’t tempt you to time the market.
Dollar cost averaging can be a good idea if you invest in index funds or ETFs with a low investment minimum. Many index funds only require subsequent investments of $100 or less. And, you don’t pay a trade commission each month.
If you have to pay a $4.95 trade fee or there’s a high subsequent investing requirement, you might be better off investing the entire balance at once.
When you don’t dollar cost average, you might wait for share prices to go lower so you can buy more shares. Or, you might wait for the market to rebound if an unexpected downturn rattles your investing confidence. In either case, you’re not investing and continue to hold cash. If you’re not careful, you might spend the money or earn a mediocre savings account interest rate.
Tip: Keep your extra cash in a high-yield savings account until you invest it.
How You Might Lump Sum Invest $1,000
The opposite of dollar cost averaging is lump sum investing. In this case, you invest the entire $1,000 at once.
This is the better option if you have to pay trade fees (i.e. $4.95 per trade for stocks) or there’s a high investment minimum. For example, you must invest $1,000 to join LendingClub.
When buying individual stocks, make sure the broker trade fee is less than 2% of your total investment. If your broker charges you $4.95 per trade, the least you should invest is $200 per trade. If you follow this rule, you can make five $200 trades with your $1,000 balance.
There are many ways to earn passive income by investing. How much you can earn depends on your risk tolerance. And, the sooner you invest, the sooner you can begin earning passive income.
What do you think is the best way to invest $1,000? Are you going to invest in one idea or several of these different options?