A Beginner's Guide To Mutual Fund Investing With $500

Investing in mutual funds is a great way to diversify your portfolio and reduce risk. Mutual funds are a type of investment that pools money from many investors to purchase a variety of securities, such as stocks, bonds, and other assets. By investing in mutual funds, you can gain exposure to different markets and industries, which can help reduce the impact of individual security performance on your portfolio.

When considering how to invest $500 in mutual funds, there are a few key steps to keep in mind. First, determine your financial priorities and goals. Are you saving for retirement, building an emergency fund, or paying off high-interest debt? Next, research and compare different mutual funds to find those that align with your goals and risk tolerance. Look for funds with strong historical performance, low fees, and a diversified portfolio of investments.

Once you've selected the mutual funds you want to invest in, you can open an account with a broker or financial advisor, or directly with the mutual fund company. You may also want to consider using a robo-advisor, which provides automated investment management based on your goals and risk tolerance. Remember to keep a long-term perspective when investing, as mutual funds are typically suitable for long-term investment horizons.

Choose a robo-advisor account

Robo-advisors are a great option for those new to investing. These automated online investment platforms allow you to input some information and create a portfolio based on factors such as how much risk you are willing to take. Robo-advisor accounts are not actively managed, so the fees are typically lower than those for accounts with human advisors. They also tend to have low or no minimum account requirements.

• Wealthfront has a $500 account minimum and charges a 0.25% annual advisory fee on your investments. It offers a range of investment options, including taxable brokerage accounts, trusts, solo 401(k)s, and IRAs.
• Betterment requires no minimum deposit to start investing and has a 0.25% management fee for a basic digital account. It also offers a variety of investment options, including taxable brokerage accounts, trusts, solo 401(k)s, and IRAs. A Roth IRA could be a good option for beginning investors as it allows you to save after-tax money that can grow tax-free until retirement.
• Vanguard Digital Advisor is another popular robo-advisor that charges an annual gross advisory fee of 0.20% for an index portfolio option or 0.25% for an active portfolio option. It offers access to high-quality investments consisting of Vanguard ETFs and robust financial planning tools.
• SoFi Automated Investing offers fee-free investment management and access to financial advisors. It has a $1 minimum investment requirement.
• Ellevest is a robo-advisor designed specifically for women investors, offering financial management aligned with their specific career and life situations. It has a $0 account minimum for the Ellevest Digital Plan and a $1,000,000 minimum for Ellevest Private Wealth Management. The monthly subscription fee for the Digital Plan is $12.

Open a high-interest savings account

If you're looking to invest $500, one option is to open a high-interest savings account. This is a good choice if you want to keep your money liquid and see it grow, but also keep your risk low. The average interest rate for these accounts hovers at around 0.05%, which is no match for the stock market's average rate of return, but it's better than nothing and there's little risk involved.

A high-interest savings account can also serve as an emergency fund if you don't already have one. Most experts recommend having an emergency fund that equals three to six months' worth of living expenses, so that if you lose your job or get hit with other unexpected expenses, you don't have to take on debt.

When choosing a high-interest savings account, look for accounts that have high interest rates and low service charges. Be willing to look beyond the larger, well-known banks—many smaller institutions, including online banks and apps, feature good rates and low deposit requirements.

• SoFi Checking and Savings: This account earns an APY of 4.30% (variable and subject to change) on the money you keep in the savings portion of the account. There is no minimum deposit requirement to open an account and there is no monthly maintenance fee either.
• CIT Bank Platinum Savings: This account pays 4.70% APY on balances of $5,000 or more. If your balance dips below $5,000, it earns a paltry 0.25% APY. There is no monthly fee.
• American Express High Yield Savings Account: The yield on this account is much higher than the average national savings rate, which is 0.46%. There is no minimum balance required for this account.
• Barclays Tiered Savings Account: This savings account earns a competitive yield. Compared to the average national savings rate, which is 0.46%, an account with a high yield helps your balance grow faster over time. There is no minimum balance required for this account.
• Capital One 360 Performance Savings: This savings account earns the same rate on all balances. There are no minimum deposit requirements to open an account and no monthly fees. The bank also offers a checking account that earns interest and has no monthly fees.

The sooner you make investing a habit, the more potential you have to reach your financial goals. Rather than stashing away $500 in your sock drawer, take advantage of the variety of options that exist to start growing your money now.

Pay off high-interest debt

Paying off high-interest debt is a crucial step before investing. This includes credit card debt, which often carries high interest rates, such as 18% or more. By paying off these debts, you effectively “earn” a lot more than you would through most investments. For example, if you have a credit card with an 18% interest rate and you pay it off, you save yourself from future interest payments.

The same logic applies if you have other high-interest debts, such as personal loans or credit card debt. It is generally recommended to pay off any debts with interest rates above 6% before investing. This is because the interest you are paying on these debts is likely to be higher than the returns you will make on your investments.

Additionally, paying off high-interest debt can improve your credit score, which can benefit you in several ways. A higher credit score can lead to lower interest rates on future loans, such as mortgages or car loans. It can also positively impact other areas of your life, such as insurance premiums and even employment opportunities.

If you are unsure whether to invest or pay off debt, a simple guideline is to compare the interest rate on your debt with the expected return on your investments. If the interest rate on your debt is higher, focus on paying off that debt first.

However, it is important to note that investing and paying off debt are not mutually exclusive. You can do both simultaneously. A balanced approach involves creating an emergency fund, contributing to a tax-efficient retirement account, and paying off high-interest debt.

In summary, paying off high-interest debt is a crucial step to achieving financial security and improving your overall financial situation. It will save you money in the long run and provide a solid foundation for future investments.

Consider a Roth IRA

If you're looking to invest $500, a good option is to open a Roth IRA. A Roth IRA is a type of tax-advantaged individual retirement account that allows your money to grow tax-free. While contributions to a Roth IRA are not tax-deductible, you can withdraw your contributions tax- and penalty-free at any time. Additionally, you can withdraw earnings without paying taxes or penalties as long as you follow certain rules: the account must be at least five years old, and you must be at least 59 and a half years old or qualify for an exemption.

• Tax advantages: One of the biggest benefits of a Roth IRA is its tax advantages. While you don't get an upfront tax deduction like with a traditional IRA, the money in your Roth IRA grows tax-free. This means that when you withdraw your earnings during retirement, you won't have to pay any taxes on them. This can result in significant savings over time.
• Flexibility: With a Roth IRA, you have a variety of investment options to choose from. You can invest in stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. This flexibility allows you to create a diversified portfolio that meets your risk tolerance and financial goals.
• Long-term growth: A Roth IRA is designed for long-term retirement savings. By investing your $500 in a Roth IRA, you can take advantage of compound interest over time. The earlier you start investing, the more time your money has to grow. Even a small amount like $500 can grow into a substantial sum over several decades.
• Withdrawal options: While it's generally recommended to leave your money in a Roth IRA until retirement, there is some flexibility when it comes to withdrawals. You can withdraw your contributions at any time without penalties, which can be helpful in case of an emergency. Additionally, if you use the funds for certain qualified expenses, such as a first-time home purchase or education costs, you may be able to avoid penalties even before the account reaches five years or you turn 59 and a half.
• No minimum contribution: Roth IRAs typically don't have a minimum contribution requirement, which makes them accessible to people who are just starting to invest. This means you can open a Roth IRA with your $500 and continue to contribute to it over time as your financial situation allows.

When considering a Roth IRA, it's important to keep in mind that there are income limits for contributing to this type of account. For the 2024 tax year, single filers with a modified adjusted gross income above $146,000 cannot contribute to a Roth IRA. Additionally, there are contribution limits, which are $7,000 for those under 50 years old and $8,000 for those 50 and older for the 2024 tax year.

In summary, a Roth IRA can be a great option for investing your $500. It offers tax advantages, flexibility in investment choices, and the potential for long-term growth. However, be sure to consider your own financial situation, goals, and eligibility before deciding if a Roth IRA is the right choice for you.

Micro-investing apps

Acorns is an example of a micro-investing app that has no account minimum, though you will need at least $5 to start investing. Fees range from $1 to $3 per month.

Another micro-investing app is Stash, which supports both automated investing and DIY investing on the same platform. Beginners will appreciate the easy-to-understand Diversification Score tool and thematic ETFs. Stash may be a great stepping stone for beginner investors, but advanced investors may not find it as useful due to the lack of advanced tools and research. Stash scores 4.7 stars on the Apple App Store but only 3.7 stars on Google Play.

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