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5 Smart Ways to Invest $500 and Grow Your Wealth

Investing doesn’t always require a large sum of money. With just $500, you can start building your financial future. Whether you’re looking to boost your savings, grow your retirement accounts, or explore other investment opportunities, there are several options available. Here are five smart ways to invest $500 and potentially turn it into much more.

1. Certificate of Deposit (CD)

Certificates of Deposit (CDs) are considered low-risk investments. When you invest in a CD, your money earns interest for a predetermined period. At the end of the term, you’ll receive your initial investment back, plus interest. As of November 2023, some CDs offer yields above 6%.

Pros

• Better interest rates than savings accounts: The average interest rate for a traditional savings account in November 2023 is 0.46%, according to the Federal Deposit Insurance Corp. (FDIC). High-yield savings accounts may fare better, but CD yields are tough to beat.
• Transparent returns: Most CDs offer fixed interest rates, so you’ll know the return you’re getting and can plan accordingly.
• Low risk: CDs from banks are FDIC-insured for up to $250,000 per depositor per insured bank and account ownership category. Coverage is similar if you open a CD through a credit union.

Cons

• $500 might go further with another investment: CDs can offer competitive yields, but some high-risk investments might perform better. The stock market, for example, has had average annual returns of around 10% for the last century. But assuming more risk also leaves you more vulnerable to losses.
• Lack of liquidity: If you really need to pull money out of a CD, you can—but you’ll likely be hit with an early withdrawal penalty. That could deplete your returns. This lack of liquidity is why it’s important to have a strong emergency fund.

2. 401(k)

A 401(k) is a common employee benefit. It’s a tax-advantaged investment account designed specifically for retirement savings. If you have access to a 401(k), you could make a $500 bonus contribution. That’s more money you’ll have in the market and earning compound interest.

Pros

• Tax-deductible contributions: The money you put into a 401(k) will reduce your taxable income. That can decrease your overall tax liability ahead of retirement.
• Potential employer match: Your employer might match some or all of your contributions, up to a certain point. Depending on the plan details, that could turn $500 into a $1,000 contribution.
• Easy way to save: 401(k) contributions are typically made through automatic payroll deductions, so you can set and forget it. If you have extra money you want to put in, you can contact your plan administrator or company benefits coordinator.

Cons

• Taxable withdrawals: When you take money out of a 401(k), that money counts as taxable income. Frequent or large withdrawals could amount to a hefty tax liability in retirement.
• Early withdrawal fees: Pulling funds from a 401(k) before age 59½ usually results in a 10% early withdrawal penalty (on top of taxes).
• Contribution limits apply: In 2023, you can contribute up to $22,500 to a 401(k). Workers who are 50 and older can contribute an extra $7,500. Make sure you’re under that limit before making extra contributions.

3. IRA

Another way to grow your retirement savings is to put an extra $500 into an individual retirement account (IRA). You can open an IRA on your own, apart from your employer, and make contributions whenever you like. They also come with attractive tax perks.

Pros

• Tax benefits: Like a 401(k), a traditional IRA is a tax-deferred retirement account. Contributions reduce your taxable income for the year you make them, and you won’t pay taxes until you make withdrawals. Roth IRAs don’t offer a tax break on contributions, but you can withdraw funds tax- and penalty-free if you’ve had the account for five years and are at least 59½.
• Easy contributions: Since you manage an IRA yourself, it’s easy to make extra contributions. You can likely transfer money straight from your bank account.
• Good for savers who don’t have a 401(k): If you don’t have a 401(k), an IRA can provide another way to save for retirement. That’s good news for freelancers, gig workers, and certain self-employed folks.

Cons

• Lower contribution limits: In 2023, you can contribute up to $6,500 across all your IRAs (or $7,500 if you’re 50 or older).
• Roth IRAs have income limits: To contribute to a Roth IRA, you’ll have to be within certain income limits set by the IRS.
• Possible early withdrawal penalties: Traditional IRAs typically charge a 10% early withdrawal penalty if you take distributions before age 59½.

4. Stocks

There are multiple ways to invest in stocks. Apart from a 401(k) or IRA, you can open a brokerage account and access the stock market that way. Individual stock investing is considered risky, but mutual funds and exchange-traded funds (ETFs) can provide a safer way to invest.

Pros

• Potentially strong returns: Let’s say you put $500 into a brokerage account that compounds monthly. With a 7% rate of return, your money would more than double after 10 years.
• Easy to invest: You can take an active role and make trades yourself, or have a stockbroker or robo-advisor take the reins for you.
• Low barrier to entry: The minimum investment for some mutual funds may be $500 or less. ETFs are also known for their low opening investments.

Cons

• Potential losses: It’s always possible that you’ll lose money, depending on your investment choices and market conditions.
• Possible fees: Robo-advisors, stockbrokers, and financial advisors typically charge fees to manage your portfolio. Even if you take a DIY approach, mutual funds and ETFs have fees of their own.

5. Cryptocurrency

Cryptocurrency has gotten a lot of attention in recent years. At one point, the price of Bitcoin shot up to $68,780. That kind of spike probably led to a big payday for some investors, but investing in cryptocurrency is a high-risk game.

Pros

• Potential for high returns: The price of Bitcoin has more than doubled over the past year and was worth over $36,000 in November 2023.
• Diversification: Holding some alternative investments like cryptocurrency can help diversify your portfolio. The idea is to invest in a mix of different asset classes to help mitigate risk.
• Low stakes in some cases: While the price of a single Bitcoin or another type of cryptocurrency can be quite high, you can use $500 to buy a fraction of a Bitcoin. You probably won’t get much, but the stakes are also lower if that’s your maximum investment.

Cons

• Overall risk is high: The cryptocurrency market is a volatile one, and values are constantly in flux. There’s simply no way to predict future returns—and major losses are certainly possible.
• Scammers are out there: There are lots of different cryptocurrency scams. Some aim to capture personal information, while others try to lure victims into bogus investment opportunities.

FAQs

How Much Money Do I Need to Start Investing?

You don’t need a lot of money to start investing. Even with just $500, you can explore various investment options and begin growing your wealth.

Which Type of Investment Has the Highest Risk?

Cryptocurrency is generally considered the highest-risk investment due to its volatility and unpredictability.

Which Type of Investment Has the Lowest Risk?

Certificates of Deposit (CDs) are considered low-risk investments because they offer fixed interest rates and are often FDIC-insured.

The Bottom Line

The best way to invest $500 depends on your financial situation, risk tolerance, and short- and long-term goals. Staying diversified is also important. If all goes well, it’s possible to grow your initial investment and net a profit.

Investments aside, you’ll also want to maintain strong credit at every stage of life. Using an extra $500 to pay down high-interest debt can help improve your credit score. Free credit monitoring with Experian is another resource to keep in your toolbox.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. Our team of experts is here to help you navigate your financial journey and achieve your homeownership dreams.

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