Millennials aren't known for being major financial risk-takers, as evidenced by their avoidance of credit cards and preference for cash. They're equally wary when it comes to investing, particularly after witnessing the perils of the stock market that have made headlines over the last few years.
For 20-somethings who are interested in playing the investment game, coming up with the money to do it is usually the hardest part. When you're putting every penny towards student loan debt or trying to make ends meet on an underwhelming entry-level salary, coming up with even a $1,000 can be tough.
Once you've gotten the cash together, the next challenge is figuring out what to do with it. Here are some of the best ways to invest $1,000 once you're ready to make the leap.
1. Open a money market account
Keeping your cash in a savings account is smarter than just sticking it under the mattress, but you won't earn a ton of interest based on the current rates. Parking that $1,000 you've been holding onto in a money market instead allows you to snag a slightly better rate while you're researching your other investment options. While you can open a money market at your local bank branch, you may be able to squeeze out a few extra pennies in interest by going with a high-yield account online.
2. Bump up retirement contributions
If you're just getting your feet wet as an investor, one of the easiest places to start is with your retirement plan. Funneling more money into your 401(k) or opening an IRA is a fairly no-fuss way to put your investment seed money to work. Adding an extra $1,000 to your annual contributions each year may not seem like much but the result is a larger nest egg down the road.
For example, say you defer $10,000 of your income into your 401(k) each year. After 25 years, those contributions would be worth right around $500,000, assuming a 5 percent rate of return. Now, if you were to bump up your deferral to $11,000, you'd see the value of those contributions grow to approximately $551,000. When you consider that it breaks down to roughly $3 a day extra that you're chipping in, it adds up to a pretty decent payoff.
3. Buy fractional shares
Purchasing individual stocks can quickly eat into the money you've set aside to invest, but opting for fractional shares allows you to get the most out of every dollar. You can use your $1,000 to open an account through a platform like ShareBuilder and choose from a variety of investments, including stocks and mutual funds.
Scheduling regular deposits to your account, either on a weekly or monthly basis, gives you an opportunity to purchase additional shares without requiring a substantial amount of money. Throwing in another $25 or $50 a month shouldn't be too taxing on your budget and it's a relatively no-hassle way to grow your portfolio.
4. Do your homework on mutual funds
Picking the right stocks is a challenge even when you're a seasoned investor and for the average 20-something, it may seem downright impossible. Mutual funds, on the other hand, take a lot of the guesswork out the process but you'll still need to do some research to find the right one. Morningstar is one of the best places to start if you're looking for an in-depth breakdown of a fund's performance. Scottrade is another good source of information.
When you're comparing different mutual funds, it's important to consider other things besides the annual return. Some of things you'll want to pay attention to include the level of risk you'd be taking on if you decided to invest $1,000 in a particular fund, the size of the fund and the different fees that go along it. Since you're only working with a small amount of cash to start, you want to make sure that a big chunk of it isn't being eaten up by sales commissions or maintenance fees.
5. Knock out high-interest debt
If you're mired in credit card debt, throwing an extra grand at the balance can make a nice dent in what you owe. Not only that, but you'll be saving yourself some money on the interest. Comparing the amount of interest you're paying to kind of returns you might expect will give you a better idea of which is the better investment.
For instance, if you've got a $5,000 balance at 18 percent and you pay $250 a month, it'll take you two years to clear the debt and cost you almost $1,000 in interest. Bringing the balance down to $4,000 in one go shaves five months off the repayment time and cuts the interest down by about $400. When you consider that it would take you five years at a 7 percent annual return to make $400 on a $1,000 investment, it's easy to see which one offers the most immediate results.
6. Invest in yourself
Deciding to invest $1,000 in yourself may feel a little selfish but you shouldn't be too quick to dismiss the idea. Using the money to start a side business, build a potentially profitable website, learn a new skill or take a class that could advance your career may allow you to reap some big rewards down the road. While there's still a certain degree of risk involved, you have the advantage by knowing what your goals are and what you need to do to maximize the odds of success.