Nearly 70% of people who get a sudden lump sum amount lose all of the money within a few years. This will happen if you don’t have a plan to invest. Even though 1000 dollars might not be much to invest in, starting with it will get you rewards in the future. Moreover, you will not lose the money or the value will not decrease because of inflation. Here are some strategies that will help you make the most of 1000 dollars.
First, pay off debts
You must pay off all the debts if you have any. Once you have a clean slate, you can start investing the 1000 dollars. There are two main types of debt: Bad debt and smart debt.
Bad debt
It has high interest, usually 10% or more, for depreciating assets like cars.
Smart debt
It’s a low-interest debt for appreciating assets like a mortgage. If you have multiple high-interest rate debts, there are systematic methods to pay them: snowball method or avalanche method.
Snowball Method pays off the lowest balance first. The avalanche method pays off the highest interest rate first. Many financial experts recommend the avalanche method as you’ll save more money if you pay off the highest interest rate first. The snowball method, however, will pay off the small debts soon, which suggests the best consolidation plan for your financial situation.
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Increase your emergency savings fund
Once you have paid off all the debt, you can build your emergency funds with the 1000 dollars until you save the money to manage three to six months’ living expenses in cash. Importantly, it should be easily accessible. Don’t be one among the 40% of Americans who are not in a position to pay $400 for an unexpected emergency expense. If you are far away from reaching a target amount of money for emergencies, you can plan to save a massive amount over the year by saving small each month. If you have used your emergency savings, you must refill it again with the 1000 dollars — it should always be up to the brim level.
Don’t deposit emergency funds in a regular bank savings account as you will hardly get any interest on your money. You can open a separate high-yield savings account with high-interest rates just for emergency funds. Usually, online banks like Axos Bank offer competitive rates.
If you cannot deposit consistently to an emergency fund, you can create a budget with spending limits. You can also use apps that give you cashback or rewards. The You Need a Budget (YNAB) app gets you $600 in two months. You can deposit these rewards directly into your emergency fund.
Stocks
You can invest in the stock market using the dollar-cost averaging (DCA) strategy to build long-term wealth. The dollar-cost averaging strategy is simply investing small amounts of the total investable cash consistently over some time. If you have a 401k retirement plan, it will be easy for you to understand: A set portion of your salary will be transferred to the 401k. The amount is automatically transferred and automatically invested. The investments happen over a set period into a fixed stock or fund.
The DCA strategy will get you returns in the long term. Since it’s automatic, your investments are made during the highs and lows of the market. Thus, you would be making investments even when you wouldn’t feel like investing when the market is low — this is good and successful traders invest like that even without the DCA strategy. This is because stocks always give you returns in the long term if you invest consistently. There are other investments to choose from as well:
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Investments
The lower your expense ratio, the less you pay. These investments have low expense ratios.
- Index funds
- Mutual funds
- Passive funds
- Exchange-traded funds (aka ETFs)
Though you will be investing your 1000 dollars in just one index fund, you will be investing in hundreds of companies within that fund — it’s a great way to diversify your portfolio. Some well-known index funds and their expense ratios:
- Fidelity® 500 Index Fund (FXAIX): 0.015%
- Schwab® S&P 500 Index (SWPPX): 0.020%
- Vanguard® S&P 500 Value Index Institutional Shares (VSPVX): 0.080%
If you want to learn more about spending the 1000 dollars, you can read our blog.
Life insurance
Level-term life insurance will have a set life insurance premium for a fixed term, usually between 20 to 30 years. It provides coverage only for a specified duration, and it has only a death benefit (the amount paid to your beneficiaries upon your passing) during the entire time. Your beneficiaries will get paid the same amount if you die anytime during the policy. It’s the cheapest and most straightforward type of life insurance available. Only 54% of American adults have life insurance, and many of those who have don’t carry the right and sufficient life insurance. The right amount of term-level life insurance has several benefits:
- It takes away the stress on your beneficiaries.
- It enables your beneficiaries to pay off debt.
- It will replace the income after death.
- It also helps the beneficiaries to pay for essentials.
Another notable benefit of level-term life insurance is the tax-free death benefit.
It’s better to get life insurance while you are young because you will be healthier than you’ll be at 50 years old. The healthier you are, the lesser your premiums will be for life. A premium is just another word for the payment that keeps your life insurance coverage active. When you stop paying your premiums, your life insurance policy stops, too.
Life insurance can be 10 to 15 times more than your annual salary. If you are just starting your career, you should not forget that your income will increase in the following years.
Get insurance if:
- You have children.
- You have large joint debts.
- Your spouse depends on your income.
- You are young and healthy and plan to have a family in the future.
Most young professionals just starting their careers usually apply for level-term life insurance for a death benefit between $500,000 to $2,000,000 and more. The most common among millennials is $1,000,000 — they would pay $14 to $20 a month, depending on their health.
Cryptocurrency
Cryptocurrency is a digital currency that can purchase goods and services that don’t involve the bank or credit but uses an online ledger with strong cryptography to secure online transactions. These unregulated currencies are usually traded with expectations of profit, with speculators pushing prices up. These transactions are verified immediately through a decentralized technology called a blockchain. You can invest in cryptocurrency if:
- You don’t have any debt.
- You have life insurance.
- You have a dependable emergency fund.
- You are investing in your retirement with a plan.
- You are already investing in the stock market.
It’s never advisable to use all the 1000 dollars you have in buying cryptocurrency. If you invest or at least read about stocks, you will be familiar with the practice of diversifying your portfolio. The same applies to cryptocurrency. You must diversify your investments so that you don’t lose all your money during everyday fluctuations.
Pros of investing in cryptocurrency
- Can get large profits
- Short investment period
- Better liquidity
Cons of investing in cryptocurrency
- Volatility
- Very new
Cryptocurrency is very new and not yet proven. It just turned 10 years old in 2019. More than stocks and other investments, cryptocurrency is generally regarded as a high-risk investment. What will it be like after ten years? Will it still be in use? Which cryptocurrency will be thriving? The answers to these questions are not clear.
Though you might have seen some people becoming millionaires overnight, these investments are extremely risky. But that also doesn’t mean that you wouldn’t make any profit or get large amounts of wealth. It’s just essential to bear in mind any investment’s long-term potential. You can check out Coinbase. It’s a cryptocurrency exchange where you can buy, sell, or trade cryptocurrency. They offer more than 30 types of crypto coins. The app is very easy to use, and you will also receive a free $5 worth of bitcoin. However, they charge high fees, and you wouldn’t get immediate support from customer service.
Roth IRA
Roth IRA is an individual retirement account (IRA) named after William Roth, a former Senator from Delaware. It permits eligible tax-free withdrawals if the required conditions are met.
In 2022, the income limit has risen to $140,000 for single filers and $208,000 for joint MAGI for a married couple. The people above and below the age of 50 are the same as traditional IRAs 2020 and 2021 — $6000 for people below 50 years; $7000 for people above 50 years. You can withdraw 100% of your Roth IRA contributions at any age, any time, and for any reason without incurring taxes, penalties, etc.
You must remember that contributions are not investment profits. Withdrawing investment profits have strict guidelines — you may incur taxes and penalties if you withdraw by ignoring the guidelines. You can consider opening a Roth IRA with M1 Finance. They offer customized investment portfolios known as “pies”. The minimum investment is $100, and they charge trading fees or money management fees is $0.
Real Estate Crowdfunding
All these years, real estate talks were confined to people having money more than $100,000 or more than $1,000,000. Today, with real estate crowdfunding, anyone can invest in real estate.
If you have paid off debts, have a reliable emergency savings fund, smoothly saving for retirement, you can consider investing the 1000 dollars in real estate crowdfunding apps to diversify your portfolio.
Real estate crowdfunding connects investors (that is, you) with real estate investment opportunities on mobile apps or social media platforms. The investors provide capital (your money) in the form of loans. You can think of it as a bank offering loans with interest – you be lending and getting profits from the interest.
The high risks
However, as always, high returns come with high risks:
- There are chances that you will be cheated
- You must wait until your money is paid back
- It’s illiquid
- Most real estate deals are usually restricted to accredited investors
If you still want to invest in real estate to diversify your portfolio, you can check out GROUNDFLOOR. You will only need $10 to start investing, and your average returns will generally be around 10.5%.
On GROUNDFLOOR, you can invest in new construction projects and renovation projects.
Another commonly used real estate crowdfunding app is Fundrise. It’s a private REIT (real estate investment trust) in which you’ll need a minimum investment of $10. The average returns are 12.42%.
Remember that all high-return investments are extremely risky. You must make sure to read all the documents and fine print carefully before you invest. If you are confused, you can contact a financial advisor for guidance.
