Six Accounts to Maximize a $500 Investment
Disclaimer: Nothing in this article should ever be considered advice, research or an invitation to buy or sell securities. I am not a financial advisor.
One of the most common misconceptions about investing is that we need a ton of money to start.
However, that couldn’t be farther from the truth.
In reality, even small sums of money have the ability to work for us:
As a result, today we’ll be looking at 6 different accounts to maximize a $500 (or less) investment.
Let’s dive in.
1. Investment Brokerage Account
A great way to start investing $500 is by opening an investment brokerage account. This is a standard investment account where we can buy, sell and hold securities.
Having one of these accounts enables us to access to buy, sell and hold different investments such as stocks, bonds and mutual funds. They operate similar to a checking account, but for our investments.
These types of accounts are also referred to as taxable or non-retirement brokerage accounts.
This is because the dividends and realized capital gains in these accounts don’t possess the same tax benefits that retirement brokerage accounts have. With that being said, money in traditional brokerage accounts can be withdrawn before the age of 59 1/2 without any penalties.
As a result, traditional brokerage accounts are a great option for those looking to do short to medium term investing due to the lack of penalties associated with cashing out (only have to pay applicable taxes).
Here is a non-exhaustive list of companies where we can open a traditional brokerage account:
2. Individual Retirement Account (IRA)
The Individual Retirement Account (IRA) is a tax-advantaged investment account specifically designed to save for retirement. Similar to traditional brokerage accounts, IRAs also allow us to buy, sell and hold a variety of investments… except these accounts come with a nice tax break.
The type of tax break depends on whether we are investing $500 into a Roth or Traditional IRA.
Investing $500 in a Roth IRA would allow that $500 to grow 100% tax-free. Any associated gains or dividends associated with that $500 can then be withdrawn tax-free.
Investing $500 in a Traditional IRA would give us a tax deduction today by lowering our taxable income. However, the associated gains and/or dividends associated with that $500 would then be subject to taxes upon withdrawal.
At the end of the day, the only difference is when we want to experience the tax benefit.
Opening an IRA is as easy as navigating over to a company like Fidelity or Vanguard and taking 10 minutes to fill out some basic paperwork.
3. High Interest Savings Accounts (Emergency Fund)
A great short-term option to invest $500 is opening a high interest savings account.
Not only do we maintain quick access to our money, but high interest savings accounts also can pay upwards of 15 – 20 times more interest than traditional savings accounts (national average is currently 0.33%).
Similar to traditional savings accounts, these accounts can also be NCUA and FDIC insured up to $250,000.
The higher interest from these savings accounts also offers a passive way to protect our money against inflation as well. I recommend checking out Bankrate for the best and most up to date offerings (they do a great job with keeping their lists updated).
4. Employee Sponsored Retirement Plans
Contributing to an employee-sponsored retirement plan like a 401k or 403b offers a lot of benefits.
Similar to IRAs, contributing to a 401k can provide tax benefits depending on the type of contribution.
A pre-tax contribution would lower our income today, but would require us to pay taxes on any gains upon withdrawal. A Roth contribution is made with money that’s already been taxed, allowing that money and associated gains to grow tax-free.
Furthermore, let’s just say we can only make a small one-time investment of $500.
Assuming that $500 earns 10% a year on average, this is what it could look like 40 years later:
While investing $500 initially didn’t seem like a lot, it eventually grew to $22,629.63. Assuming we made a Roth contribution, that money would be tax-free upon withdrawal.
Finally, our employer might match the first X% on our contributions. These employer matches are essentially free money, meaning at the very least we will have automatically made X% (whatever the match rate is) on our $500 investment.
Given the long-term tax benefits, compounding growth, and possible immediate risk-free returns… contributing to an employee-sponsored retirement plan is one of the best ways we could invest $500 over the long term.
5. Certificate of Deposits
A great middle tier option for short term investing are Certificate of Deposits or CDs.
CDs are similar to bonds in that we are investing a fixed amount of money for a fixed period of time while earning a fixed interest rate. However, CDs are better short-term investments and are considered safer than bonds (with the exception of U.S. treasury bonds).
Common time periods for CDs are 3, 6, 12 & 24 months.
When we invest in a CD, we will be unable to withdraw our money until the CD’s maturity date. If we do want to withdraw our money early, most of the time this will result in an early withdrawal penalty.
While we can’t touch our money without incurring an early withdrawal penalty, we are locking in a guaranteed interest rate on our money. Interest rates on CD’s are typically higher than those of high interest savings accounts because the money is tied up for a fixed period of time.
With all that said, investing in CDs is easy. We can either look at online bank offerings for the best rates or even just walk into our local bank’s branch.
If we know that we will need that $500 in the next few months/years, CDs offer the opportunity to lock in higher interest gains without any chance of losing our principal investment.
6. High Interest Debts
I know that paying down high interest debt sounds like a weird way to invest $500, but let me explain.
Let’s assume that we carry a credit card balance with an interest rate of 20.40% (the average credit card interest rate as of Q3 2022). However, the average stock market return is 10% on average.
This would mean that paying down the credit card balance would provide a 10.4% higher return on that $500 than investing in the stock market. This is because the credit card balance costs more than the potential returns through investing.
This is the same logic on why paying off our mortgage right away isn’t always the best idea if we have a low interest rate locked in. Assuming a mortgage rate of 4%, investing our money in the stock market has the potential to earn 6% more on average relative to if we used that money to pay down a mortgage.
Final Thoughts
$500 may seem small, but it can have a large impact.
Depending on our life circumstances, there are a lot of different ways to enable that money to work for us.
Whether we are wanting to safely earn some short-term interest while saving for a vacation or working towards financial independence, investing $500 is a great start to achieving our goals. Now that we know where we can invest our money, we should also ensure that we are optimizing our investing strategy.
Thank you for reading!
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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