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25 Ways to Invest $1000

Updated on April 2, 2015
KeithTax profile image

Keith Schroeder writes The Wealthy Accountant blog with 30 years experience in the tax field. He is the tax adviser of Mr. Money Mustache.

How to Invest $1000

Where will you invest your next $1,000?

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In a previous hub I outlined financial planning basics and mentioned the single most important factor in building wealth: starting. That is where we will go today. Investing those first dollars is important and the choices are daunting. I will sift through the choices for you, providing a simple explanation on each investment.

Use the accompanying tables to compare risks and tax attributes of each investment. In a glance you can choose an investment with a level of risk you are comfortable with coupled with tax deductions or tax-free growth if you so choose.

I have also used a larger number of videos than normal. Rather than view every video, consider reviewing the video on the select choices you have made for your initial investment. Bookmark this hub for future reference. As your money grows you will want to review videos relevant to your improving financial situation.

Banking and the Emergency Fund

You need to start with an emergency fund if you do not have one. Local banks and credit unions still cater to the small saver without fees. Banks and credit unions are not sexy, but they are safe and when investing your first $1000, you want safe.

  1. Savings accounts
  2. Checking accounts
  3. Money market accounts
  4. Certificates of Deposit
  5. Online banking

An emergency fund is short-term money and all short-term money must be invested in guaranteed or ultra safe investments. The bank deposits listed fit this bill. You can start an account with less than $100 at many small local financial institutions without fees. My kids have CDs and savings account at a very small credit union. There are no fees and they get paid interest on small amounts.

Bank accounts allow you to add money in any amount at any time. As you build your account for the next investment level, bank deposits are a powerful tool. Too many people today avoid bank deposits. That is a bad move. Banks have powerful tools to build wealth. Use them.

Another choice is online banks like ING Direct. Online banks generally pay a little better rate of interest. If you are comfortable with sending your money, online banking is for you. Most have low or no fees. Online have all the products local banks have.

Retirement Accounts

Comparing the Traditional and Roth IRA

What is a Keogh

Retirement Savings

Investing in a retirement account produces double benefits. You either get a tax deduction and deferred growth or you get tax-free growth. There are numerous options. You have retirement account options at work, in your own business, and on your own. At work you have:

  1. 401(k)
  2. Roth 401(k)

For most people, you can save the most for retirement in a 401(k). Coupled with employer matching, this powerful tool allows you to build a nest egg fast. The Roth 401(k) does not provide a deduction, but grows tax-free.

Small business owns have:

  1. SIMPLE
  2. SEP
  3. Keogh

Each has its own benefits and restrictions. Small business owners can sock $40,000 into a retirement plan a year with planning.

You can also use:

  1. Traditional IRA
  2. Roth IRA

Traditional IRA contributions are deductible and distributions are taxable. Roth contributions are NOT deducted on the tax return, but grow tax-free. The Roth IRA is superior in so many ways. There are instances where the traditional IRA is better, but for most, the Roth is the only real option.

ETF Intro

Opening a Treasury Direct Account

Traditional Investments

  1. Stocks
  2. Mutual Funds
  3. ETFs
  4. Corporate bonds
  5. Muni bonds
  6. Treasury bills, notes, and bonds
  7. Treasury Inflation Protected Securities (TIPS)
  8. Savings Bonds
  9. I Savings Bonds

When talking investing many people assume stocks. Investing in stocks has changed over the years. In the days when dinosaurs walked the Earth, people actually bought individual stocks and collected the dividend for thirty years. Then, evolution created mutual funds and the small investor could invest small amounts into a basket of stocks for a modest fee. Mutual funds are actively managed with the exception of index funds. Fees have crept up over the years and performance has not matched the market as a whole. The promise of mutual funds left many with a bad taste in the mouth.

Evolution stepped in again to create Exchange Traded Funds or ETFs. ETFs work like mutual funds with lower fees. ETFs are not actively managed. They look and feel more like an index fund than a regular mutual fund. ETFs are available on just about any asset class you can think of. ETF fees tend to be significantly lower than mutual funds and are purchased like individual stocks.

Bonds also have multiple opportunities. Small investments into corporate or muni bonds is difficult to impossible outside a mutual fund or ETF. U.S. Treasury securities are a different story. You can invest small amounts into the safest investment on the planet at Treasury Direct. There are no fees.

EE and I Savings Bonds can be purchased in any amount at any time up to $5,000 per year. I Savings Bonds adjust the interest rate every six months to protect you from inflation. Interest is state tax free. For the small investor, I Savings Bonds are about the best deal out there.

You can also purchase Treasury bills, notes, and bonds on Treasury Direct. Since you are purchasing right from the government, there are no fees. Bonds must be purchased in $100 increments. As a reference: Treasury bills are government debt instruments that mature in one year or less, notes mature in 2-10 years, and bonds mature longer than 10 years.

You can build a powerful and safe net worth with the U.S. Treasury alone.

Options Intro

What is a Margin Account?

High Risk Investments

  1. Gold
  2. Options
  3. Other Commodities
  4. Leveraged accounts

Odds are good that if you are reading this hub you should not invest in these high risk accounts. Gold and other commodity investments are available in ETFs and should only be considered if you understand the risks involved.

Options carry significant risks and would never amount to more than a token amount in any portfolio. For your $1,000, avoid options, otherwise, you might be starting over from $0 again.

Margin accounts (borrowed money to invest) carry special risks and fees. Some ETFs are leveraged. The average investor should avoid these accounts due to the high risk involved. In any case, they will make up a very small part of any portfolio.

Risk Comparison

Account
Guaranteed
Safe
Moderate Risk
High Risk
Savings Account
x
 
 
 
Checking Account
x
 
 
 
CDs
x
 
 
 
Money Market Account
 
x
 
 
Online Banking
x
x
 
 
401(k)
 
 
x
x
Roth 401(k)
 
 
x
x
SIMPLE
x
x
x
x
SEP
x
x
x
x
Keogh
x
x
x
x
Traditional IRA
x
x
x
x
Roth IRA
x
x
x
x
Stocks
 
 
x
x
Mutual Funds
 
 
x
x
ETFs
 
 
x
x
Corporate Bonds
 
 
x
x
Muni Bonds
 
x
x
 
Treasuries
x
 
 
 
Treasury Savings Bonds
x
 
 
 
Options
 
 
 
x
Commodities
 
 
 
x
Leveraged Accounts
 
 
 
x
Note that many investments have multiple risk levels. An IRA in a bank CD is Guaranteed, but in a mutual fund carries risks.

Taxes on Investments

Investment
Deductible
Non-deductible
Tax Deferred
Taxes
Regular Bank Accounts
 
x
 
Fed & State
401(k)
x
 
x
On Distribution
Roth 401(k)
 
x
 
Tax-Free
SIMPLE
x
 
x
On Distribution
SEP
x
 
x
On Distribution
Keogh
x
 
x
On Distribution
Traditional IRA
x
 
x
On Distribution
Roth IRA
 
x
 
Tax-Free
Stocks
 
 
Taxed When Sold
Mutual Funds
 
 
Taxed When Sold
Stock, Mutual Fund Dividends
 
 
Taxed When Paid
ETFs
 
 
Taxed When Paid
Corporate Bonds
 
 
Fed & State
Muni Bonds
 
 
Tax-Free*
Treasury Securities
 
 
State Tax-Free
Commodities
 
 
Fed & State
Options
 
 
Fed & State
*Muni bonds are federal tax-free, but only state tax-free if muni bond is from within your state, D.C., Guam, or Puerto Rico.

Comments

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    • Iampankaj profile image

      Iampankaj 

      6 years ago from Bangalore

      A very nicely compiled Hub. Thanks for this useful hubpage. It must have taken lot of time to design & select content for each capsule. Nice job.

    • profile image

      stessily 

      6 years ago

      Keith Tax, This is an excellent resource which you've provided here. It is organized, clear, and helpful.

      Thank you for taking the time to compile this information and design the tables.

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