Given the amount online brokers spend on advertising — Kevin Spacey doesn’t come cheap — you’d think they’d take your money any way they can get it.
You would be wrong: Many brokers have initial deposit requirements. And once you’ve passed that hurdle, minimums for each mutual fund can stretch to $2,500 or more. Ideally, you want to hold a handful of those funds to spread your investment around.
All of that means investing is one of the many things that is easier for the rich. But it’s also one of the best ways to get rich, and you can easily start down that road with $1,000.
Double your money with a 401(k)
If you, like everyone else, enjoy free money, you should get to know your 401(k). Some 80% of full-time employees have access to these retirement plans, which very often include matching dollars from the employer. You put in a little, your company kicks in a little and that $1,000 quickly turns into $2,000.
These plans offer a tightly curated investment selection, primarily mutual funds, index funds and exchange-traded funds. There are typically no investment minimums on the funds offered within your account, giving you access to the kind of diversification a big-dollar investor might take for granted. You can easily spread even small amounts over five or six funds, creating an asset allocation that meets your risk tolerance and time horizon. (If you need help with that, here’s how to invest your 401(k).)
There is one catch: 401(k)s are funded via payroll deduction, which means if you’ve saved up $1,000 to invest you can’t easily plunk that lump sum into this account. What you can do, in most cases, is work the system a bit by setting your contribution to the percentage of your pay your company matches. Say that pulls $100 out of each of your next 10 paychecks; as it does, repay yourself from the $1,000 you’ve set aside to invest. Once that money is gone, you can stop contributions — but you might just find you want to continue them.
Choose the right online broker
Yes, online brokers often have minimums, but not always. This quick-use brokerage search tool will easily sort to the options that require a low or no initial deposit.
You’ll note that Charles Schwab spends a lot of time at the top of the results. Its $1,000 minimum can be waived with auto-deposits of $100 a month, and the broker offers a lengthy list of no-transaction fee mutual funds with minimum investments of just $100. You can make subsequent investments for as little as $1. That’s a big deal, because momentum is key to saving, and regularly squirreling away small bits of money is a great way to get rich.
If this is your first account outside of a 401(k), you’ll probably want a Roth or traditional IRA. Both give you tax perks for saving for retirement.
Diversify with a robo-advisor
You can also open an IRA at a robo-advisor, which is an automated investment management service. You share some details about your goals and when you want to reach them, and these services will build a portfolio for you, typically out of low-cost ETFs.
There are several benefits here: One, you don’t have to delve into the finer details of your investments if that’s not your thing. Also, robo-advisors can diversify small amounts of money. ETFs trade for a share price, and some advisors, like Betterment, purchase fractional shares, which means you don’t even have to come up with enough cash for the share price.
Because the bulk of their services depend on automation, robo-advisors are fairly inexpensive. Wealthfront has a $500 minimum but manages the first $10,000 invested completely free, which means you’ll pay nothing for its service on a $1,000 deposit.
Choose commission-free ETFs
Could you build an ETF portfolio all on your own? Sure (minus those fractional shares).
To do that, you’d want to open up an account at a broker — again, one that has an account minimum you can meet — and then select funds from its list of ETFs that trade commission-free. Don’t skim over that part: If you pay a commission for each ETF you purchase, you could easily be out $50 right off the top.
Most, but not all, online brokers offer a decent selection of these funds. NerdWallet has a list of the best brokers for commission-free ETFs; Charles Schwab tops this list again, along with TD Ameritrade.
Wipe out your debt
An often-overlooked but easy way to land a big and guaranteed return on that $1,000 is using it to pay off high-interest-rate debt like credit cards or personal loans.
The rule of thumb here: If the interest rate on a debt is higher than what you could reasonably earn investing the money, pay off the debt. Given that credit cards can carry interest rates of 20% or more, and investing returns historically average around 7% over the long term, it makes sense to pay down credit card debt in many cases.
It might not be a traditional investment, but you’ll save money — and sticking it to the debt man just feels good.
Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: aoshea@nerdwallet.com. Twitter: @arioshea.
Image via iStock.
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