How to Invest $500 to Build Wealth - SmartAsset (2024)

If you have $500 that isn't earmarked for bills, that's enough to start investing. It may or may not feel like a fortune to you. But with the right investments, it can definitely be used to start one. So if you want to take $500 and turn it into something more, here are two basic questions you need to answer if your goal is to get startedlong-term investmentsand build long-term wealth.

INFinancial Advisorcan answer your questions while helping you create a financial plan for the future.

What types of securities to invest in

There are two basic considerations when deciding how to invest $500, or any amount for that matter. One of these is the type of securities you want to invest in. These may include shares, bonds or alternative investments.

Investment in shares

For starters, you don't need to spend $500 on itpils. Popular companies, especially those among the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) can be purchased for hundreds to thousands of dollars per share. But then your $500 is gone if you're lucky enough to buy one.

But you can make it easy for yourself to buy shares in smaller companies for as little as $1 or $5 per share. stock. Starting small and investing in multiple stocks can even give you the opportunity to develop a diverse portfolio.

Investing in bonds

Bondscan be a good alternative if you are not a fan of participating in a volatile stock market. Bonds are fixed income securities where you lend money to the government or a company and you get money back from them over a certain period of time. And while bonds don't offer higher returns than a stock potentially could, bonds offer less risk of losing money than a stock could.

Given the characteristics of bonds, they provide good diversification in your portfolio if and when you add stocks.

Savings account with high return

You can invest in itsavings account with high returns. At the time of writing, it was possible to find high-yield savings accounts that provide an annual return of more than 4%.

If you deposit money every month, you will of course earn even more. The advantage of putting your money in a high-yield savings account is that you can withdraw the money whenever you want, for an unexpected expense or emergency, without penalty. That is also the disadvantage. You won't save much if you take the money out of the account.

Certificate of Deposit (CD)

INdeposit certificate, or CD, is a low-risk way to make money that banks and credit unions offer. But the most important thing to remember about CDs is that they have an expiration date. You buy a CD and the expiration date can be as little as 28 days, but it can also be up to 10 years.

As long as you purchase a CD through a reputable institution that is FDIC insured up to $250,000, you won't lose your money. The only way buying a CD is a risk is that if you buy a CD and then decide to withdraw your money before the maturity date, you will pay a withdrawal penalty.Some of the best CD prices can be found here.

Where should you place the securities you invest in?

Once you've decided what types of securities you want to invest your $500 in, you need to consider what type of financial structure you want to put it in. You have many choices, each with different benefits. Here are some of your choices.

Commission-free ETFs

Many online brokers offer thisexchange traded funds(ETFs) to clients. These are similar to mutual funds, but can be bought or sold on an exchange. These ETFs are funds that contain many different types of investments. You can invest in an ETF that holds shares,raw materials, bonds or a combination of all three. Because you invest in many investments, your risk is lower than if you invest in one investment.

Investment funds

Get started with oneinvestment associationwith $500 in your pocket is pretty easy. There are many mutual funds that investors can get started with without minimum requirements. This means that you can start investing from just €1. Mutual funds are often managed by active managers who buy stocks, bonds and other investment instruments and these managers decide when to sell them. And just like with ETFs, there is diversification within yourwalletIn an investment fund you are less exposed to risks.

An IRA or Roth IRA

Consider investing $500 in oneindividual retirement account(IRA), which gives you options including stocks, bonds, and mutual funds. If you don't have an IRA, $500 can easily get you started at many banks and credit unions. You can also open IRAs with online brokerages and investment companies. In fact, you might be able to use some of that $500 to open an IRA and invest the rest of your money in another financial vehicle. (Some financial institutions require an amount of $500 or less.)

And if you open an IRA, you'll need to decide whether to open a traditional IRA or notRoth IRA. A traditional IRA allows you to take tax deductions. But if you receive benefits as a retiree, you will pay taxes years later. A Roth IRA doesn't give you a tax benefit the next time you file your taxes. But when you retire, you can withdraw the money tax-free.

Other choices include a 401(k), a 403(b),in 457, a 529 plan and even a health savings account. These can all 'hold' no matter which securities you decide to invest in. Just make sure your choice reflects your goals (study, retirement, home purchase), timeline, tax needs and your personal risk profile.

In short

If you have $500 to invest, there's no need to rush into investing. You also shouldn't invest $500 if you think you'll need it soon. The best way to earn a lot with an investment is bygive your money time to grow. So if you think you need the money, or you're just not sure what to do, investing the $500 in a high-yield savings account is probably your best bet. You can always withdraw the money later without incurring a penalty.

Tips for investing

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