5 Smart Ways to Invest $1,000
‘Tis the season for holiday bonuses
Maybe you’re getting a holiday bonus or expecting a healthy tax refund early next year. Whatever the reason, if you find yourself on the receiving end of an unexpected chunk of change (say, $1,000), investing it properly could seriously pay off down the road. But where do you start? We asked Sallie Krawcheck, CEO and cofounder of Ellevest (an online investing adviser for women) for her guidance.
Pay Off High-Interest Debt
Ugh, credit-card debt—and the interest rates attached to it. First things first: If you find yourself with an extra $1,000, don’t do anything with it until you’ve erased that bill. Interest rates on credit cards today typically range from 12 to 22.6 percent. This means that if you buy something for $1,000 on a credit card in the middle of that range, it could cost you more than $1,175 to pay it off a year later. Yikes. On the flip side, “good” debt—like a student or home loan—is something you can focus on less since the interest rates tend to be lower (usually around 4 to 6 percent). That type of debt is generally OK to leave outstanding, as long as you make your regular payments on time.
Start an Emergency Fund
So you’re in the clear from high-interest debt, but the balance in your savings account is looking pretty depleted—or worse, it’s nonexistent. Think about it: You probably don’t want to charge a new transmission on your credit card, and you can’t pay your rent with plastic if you lose your job. Your emergency fund should have a solid three to six months’ worth of your take-home pay squirreled away. If you haven’t started one yet, that $1,000 is a good beginning. If you have one already, this is an extra cushion.
Start a Retirement Account
Sure, it feels years away, but if your company offers a 401(k) plan, take advantage of it—now. Of course, you can have a small amount taken out of each paycheck (which is actually advised), but you can also make contributions to your 401(k) of up to $18,000 for 2016. If you haven’t been making contributions or “maxing out,” an extra $1,000 in your pocket is the perfect way to up your retirement balance by the end of the year.
Kick Your Retirement Account Up a Notch
Go, you—you’ve already been contributing to your 401(k). This extra $1,000 is your chance to make your retirement look more Golden Girls than Grey Gardens. Enter the individual retirement account (IRA). There are two types of IRA that you can open yourself: traditional and Roth. While anyone can contribute to a traditional IRA (making it a great option for freelancers and anyone without a retirement option through their employer), eligibility for a Roth IRA is based on your income level. Whichever one you choose, the bottom line is that it lets you add thousands of dollars a year to your retirement savings or helps you make up for lost time if you’re worried about falling short in your golden years. (FYI, you can contribute up to $5,500 to an IRA in 2016.)
Now Invest in Your Goals
OK, if you’re rock solid in all the areas above, that $1,000 is a great jumping-off point toward whatever’s next. Don’t just save for big goals—invest in them. You could actually achieve them sooner, but here’s the catch: You have to be comfortable with risk. Historically, the stock market returns an average of more than 9 percent. Sure, odds are you won’t see returns that high, but the key is to invest and manage risk at the same time. Talk to your financial adviser about investing regularly (starting with your $1,000) in a diversified portfolio of low-cost exchange-traded funds (ETFs). Basically, these are well-diversified investments—and a lot like mutual funds—but they trade throughout the day like stocks. (They are also more tax-efficient and, in most cases, have lower fees.) It’s a better long-term strategy than playing stocks willy-nilly and it can help you make investing a habit versus a one-time thing.