Would-be investors hardly need to be millionaires to get started. No amount of money is too little to begin investing, and there’s no single best way to invest money that suits everyone’s needs and lifestyle.
If you’re looking to put your $2,000 to work, you have several options. Here’s what to consider before investing your money.
3 questions to consider before investing
1. Do you need to create or shore up your emergency fund?
No one likes to think about unexpected challenges like medical crises or job layoffs. But though investors can’t plan for these events themselves, they can plan to be able to handle them financially. As a rule of thumb, most financial advisors suggest building an emergency fund that would cover at least three to six months’ worth of household expenses. It should be in a liquid form like a savings account so the money can be cashed out quickly.
2. What are your goals for this money?
Consider your goals and values on two levels. First, the personal: What are your financial goals and your time horizon for achieving them? One young investor may be looking long-term to their retirement plan, interested in putting their $2,000 to work earning compound interest over many years; a father in his 40s may be planning for a short-term goal like a family vacation. It goes to show no specific investing strategy is right for everyone.
Some investors may also consider tying their personal values to their personal finance decisions. Socially responsible investing can help investors who want to make financial choices that can positively impact society and the environment, because it prioritizes companies with a solid track record in environmental, social, and governance issues (ESG).
3. How much risk am I willing to take?
Investing is a balance of risk and reward. Lower-risk investments like bonds often offer slow, steady growth with a comparatively limited upside. By contrast, high-risk investments such as cryptocurrencies can potentially bring big wins—but also possible big losses, and these sectors tend to be volatile.
Some investors may be looking solely for the safest investments, but they should be cognizant that all investments require some degree of risk tolerance. If that’s not appealing, one alternative to investing that $2,000 is opening or funding a high-yield savings account that offers interest rates that are better than average.
7 ways to invest $2,000
1. Index funds
If you’d like to get into “the market” but aren’t sure which stocks to buy, you might consider buying into a fund that gives you exposure to the overall stock market performance. These funds are either mutual funds or exchange-traded funds (ETFs), and their goal is usually to try to match the performance of a market index, like the S&P 500. This is a passive approach to investing: It endeavors to mirror a benchmark.
2. Actively managed funds
Actively managed funds are managed by professional investors who choose individual securities in an effort to beat the performance of a benchmark. Fund managers use research and analysis to look for investment opportunities either by finding undervalued shares or by timing the buying and selling of securities to beat their benchmark. These funds can be higher-risk and higher-fee than passive options like market index funds, but they may also offer the potential for greater gains.
Another option for creating your portfolio is a robo-advisor, which is an automated online tool that manages your investments. Investors provide information like their age, investing time horizon, and goals. The robo-advisor uses that data to select a mix of investments, leveraging expertly created algorithms to make their picks. Those algorithms are informed in part by historical market performance data, and because moves are automated, investors don’t need to stay actively engaged in market goings-on. Robo-advisors also rebalance often, without investors needing to take action.
Investing in the stock market looks different for every investor. It’s a bit of a choose-your-own-adventure story: You may choose active or passive investing approaches, lean toward more risk or less, select value or growth stocks, or buy shares of companies that pay dividends to shareholders.
Results are never guaranteed but investing in stocks may lead to gains, especially if your time horizon is long. It may also generate passive income and help your money stay ahead of inflation: The average stock market return was 13.9% annually from 2011 to 2020.
5. 401(k)s and IRAs
Putting your $2,000 into a retirement account may not only set you up for the future, but also provide tax advantages that the government offers to encourage people to save. One category is tax-deferred accounts that are invested into markets, which lower investors’ taxable income now and no taxes are charged until the funds are withdrawn in retirement.
This category includes employer-supplied 401(k) retirement plans, in which money is automatically collected from the worker’s paycheck before taxes are taken out and deposited into the account. Because 401(k)s are funded by paycheck withdrawals, you’ll need to opt to increase your contributions to get the $2,000 there.
An Individual Retirement Account, or IRA, is another type of tax-deferred account. Then there’s the Roth IRA, which works the opposite way: Investors pay taxes on the money they invest now, but no taxes are charged when they withdraw it in retirement—on either the principal contributed or any gains earned. Note there are annual contribution limits for each of these account types, and in most cases, investors would incur penalties for withdrawing funds early.
6. Real estate investment trusts
Unfortunately, no matter where you live it’s unlikely that $2,000 will cover a down payment for a home; in some regions it won’t even cover the monthly mortgage payment. But if you want to invest in real estate and your ambitions are currently bigger than your wallet, you can still get exposure to this market without buying any property. Investors can buy into real estate investment trusts (REITs), which are companies that sell shares in their various real estate investments.
Traditional REITs are publicly traded funds that are legally required to pay investors 90% of their taxable income each year, and they’re also eligible for the 20% pass-through deduction come tax time. Another option is eREITs, which let investors buy in with a low barrier to entry. But the structure of each eREIT can vary by company, dividends aren’t guaranteed, and they tend to be less liquid.
Like the real estate market at large, all types of REITs may fluctuate. Monetary policy and interest rates can affect buyers’ purchasing power, and commercial real estate took a dive as the COVID-19 lockdown began.
7. High-yield savings account
All investments in a market whose value goes up and down—whether it’s bonds, stocks, or art—require some degree of risk tolerance. If the idea of putting your $2,000 at any kind of risk isn’t appealing, you may opt for an alternative: a high-yield savings account.
High interest rates can help your savings grow faster, and these types of accounts offer rates that are better than traditional savings accounts. Investors can open these high-yield accounts at credit unions and banks, both online and brick-and-mortar. Note that fees may apply if the account drops below a required minimum investment, or if an investor makes above a certain number of withdrawals.
Another caveat: Accounts’ interest rates can change. Sometimes that’s because the bank offered an attractive, temporary promotional rate to entice a new customer. Other times it’s because of the macroeconomic situation, as banks tend to follow the Federal Reserve’s lead in adjusting interest rates.
The bottom line
Investors with $2,000 to put to work have several options. After ensuring they have a solid emergency fund and have figured out their financial goals and risk tolerance, some of their many investment options include high-yield savings accounts, index funds, actively managed funds, robo-advisors, stocks, and real estate investment trusts.