How to Invest $500 - NerdWallet (2024)

If investing seems like a rich person’s game, it’s not your imagination. Many investments cater to the wealthy, but there are plenty of ways to invest $500.

After all, regularly investing as much as you can over a long time horizon might be the best path to building wealth — especially if you have paid off high-interest credit card debt and you're contributing enough to earn any available 401(k) match from your employer.

With brokers and robo-advisors requiring low minimums, anyone can participate. Here are five points to consider when investing $500.

If you're not already saving for retirement — or you are, but not as much as you’d like — the best place for this money is an individual retirement account.

IRAs are specifically designated for retirement, which means you get tax perks for contributing. There are two main kinds: A traditional IRA gives you an upfront tax deduction, but you'll pay taxes when you take distributions in retirement. With a Roth IRA, you earn no tax benefit today but can pull out money in retirement tax-free. Both accounts have rules around contributions and distributions.

If you're on track for retirement or planning to use the money for a different long-term goal, you can open a taxable brokerage account instead. A brokerage account is an all-purpose account with no special tax breaks. You may use money for any reason, and there are no rules about how much you can contribute or when you can take withdrawals.

If you want someone to invest this money for you, you should know about robo-advisors.

Robo-advisors will build an investment portfolio for you based on the information you share, such as your goals, investment time horizon and risk tolerance. They're one of the best ways to begin investing. You'll pay a management fee for the service, typically a percentage of assets under management. In other words, you pay a percentage of your account balance.

If you'd rather use this money to learn how to invest so you can do it yourself going forward, that’s a sound strategy, too. The next few steps discuss this further.

It’s tough to buy enough individual stocks with $500 to adequately diversify that money. For instance, a single share of Apple stock currently trades for between $150 and $200. Diversification is important because it spreads your investment around — when one investment goes down, another might go up, balancing things out.

Enter exchange-traded funds. ETFs are a kind of mutual fund, meaning they allow you to purchase a number of different investments in a single transaction. In the case of ETFs, the investments within the fund are designed to track an index, such as the . When you buy an S&P 500 ETF, it should closely mirror the performance of the S&P 500. Many brokers, especially those geared toward new investors or retirement investors, offer a list of commission-free ETFs that can be traded at no cost.

ETFs trade through an exchange like stocks and sell for a share price. You could get a few ETFs and be fairly well diversified for $500. Future investments could boost that diversification further.

Money you need for a financial goal in the next five years shouldn't be invested at all, as you don't have time to ride out the market’s waves. Money for a long-term goal, such as retirement, should be invested. Time allows your money to grow and bounce back from short-term market fluctuations.

The potential payoff: $500 invested at a 10% return for 30 years could grow to around $10,000 before inflation, 20 times your initial investment.

Even better would be to use this windfall to kickstart an investment-savings habit by opening an account and auto-contributing $10 or $100 more per month. For example, open a Roth IRA with $500 and contribute $100 a month, and after 30 years and with a 10% rate of return, that cash could grow to $238,000 before inflation.

With any investment, the more time it has to grow, the better. But life often gets in the way. One added feature of a Roth IRA is that you can take out contributions anytime. (This differs from the rules about earnings, which stipulate you have to wait at least five years to withdraw from a Roth IRA. And with traditional IRAs, you must pay taxes plus a 10% penalty for most withdrawals before the age of 59½.)

If you want to hold on to the cash for a rainy day by feeding your emergency fund, that’s OK, too. But there are some alternatives better than putting money in a mattress or tucked in a big-bank savings account: high-yield online savings accounts, money market accounts, short-term bonds and peer-to-peer lending may earn better rates.