If the term “investing” conjures up images of stock market whizzes and real estate magnates, rest assured that no amount of money is too small to invest. If you find yourself with an additional few hundred dollars thanks to a work bonus, a tax refund, or any other unexpected windfall, you can make an investing plan—assuming you’re already on solid financial footing for the long run. 

Here’s what to consider before investing your money, and how to invest $500.

3 questions to ask yourself before investing 

If you’re looking to invest your extra cash, it may be a great opportunity to start a smart retirement plan, explore mutual funds, or purchase individual stocks. But if you might really need that $500 in case of the unexpected, or if you aren’t aware of the risk that some of these personal investments may pose, it may not be the time to invest. Ask yourself:

1. Do you already have a solid emergency fund?

Unexpected life events can result in unexpected costs like medical bills, car repairs, or layoffs. That’s why personal finance experts recommend setting aside an emergency fund that can cover at least three to six months’ worth of household expenses, and that it’s in a liquid form in savings accounts that can be quickly accessed. 

Despite that rule of thumb, according to a Federal Reserve report released in June 2022, 43% of American adults surveyed the prior year would have difficulty paying an unexpected $400 expense. Unfortunately, unanticipated events can happen. So before getting started in investing or researching safe ways to invest money, setting up a “rainy day” fund is the first step.

2. What are my financial priorities? 

Getting started investing may be a great option to begin building wealth, but it can be helpful to establish personal investing goals. Are you hoping to invest for the long term and rack up compound interest over a span of years? Are you saving for a short-term goal like a vacation or a long-term one such as a college fund? Your priorities and time horizon will help guide you to the type of financial products that may be a fit for you.

Assessing your priorities also includes determining how much risk you’re willing to take on. Every investment includes some degree of risk, but it’s a wide spectrum—from purchasing less-risky bonds to taking a chance on an individual stock, to buying into the volatile cryptocurrency market. Lower-risk investments are typically steadier but may offer more limited gains, while riskier assets are the opposite: They present the chance for big gains, but also the potential for big losses.

3. What are my alternatives?

If investing—or any degree of risk—isn’t a fit for you right now, you may choose to put that $500 to work in different ways. You may consider knocking off some debt like student loans, auto loans, or credit cards, particularly if they carry a high interest rate.

Another investing alternative is opening or funding a high-yield savings account, which offers interest rates that are better than average. Note that some banks, especially those that are online-only, may have no minimums while others may require a deposit of $100 or more to open the account. 

5 options for investing $500

Once you’ve set up solid savings and you’ve determined your priorities as well as your risk tolerance, you may choose to explore the many investment options available to you. Here are a few of those options, from what experts consider the least risky to the most.

1. Bonds

The bond market is typically held up as a safe haven, a place where investors can plunk down cash and it may grow slowly and modestly—but steadily. What exactly is a bond? Think of how an individual gets a loan from a bank for college or a car. A bond is the business version: It’s essentially a loan made to a company or government entity, with funds raised not from a bank but by investors who purchase bonds that the entity issues. 

Bonds function as a sort of IOU, outlining how and when the entity will repay the debt to the bond purchaser. There are many different types of bonds, but they share some commonalities: They pay the bondholder a regular return over a specified period, with the full amount of the price they paid returned to them at the end of that period. Bond prices move in opposition to interest rates, so when interest rates rise, bond prices fall and vice versa.

Some investors use bonds as a source of fixed income, and in fact they often are referred to as fixed-income investments. Certain kinds of bonds come with tax advantages. But bonds typically provide a lower return than stocks, and they may not be as easy to sell. Inflation can hurt bond investors’ fixed returns as the rising rates send prices lower.

2. Retirement accounts

To encourage people to save for retirement, the U.S. government created several types of  tax-deferred accounts, which let you lower your taxable income now, and defer the taxes on those funds until you withdraw them in retirement. Many employers offer 401(k) retirement plans, in which money is collected from an employee’s paycheck before taxes are taken out, and those pretax funds are automatically deposited into an account to be invested into stocks, bonds, and other assets. Particularly if you’re young, throwing an extra $500 into a 401(k) or individual retirement account can help you reap even more compound interest. And make sure to check if your employer makes matching contributions.

You may also opt to shore up or start other tax-advantaged accounts like a Roth IRA. With a Roth, the investor pays taxes on the money invested now, but when they withdraw it in retirement, they won’t pay taxes on that amount—including on any gains earned. 

Like any market portfolio, retirement accounts can be shifted to more risky or more conservative depending on risk tolerance and time horizon. Investing in stocks may lead to gains, especially over the long term. Though results are never guaranteed, stock investments can generate passive income and may also help investors stay ahead of inflation: The average stock market return was 13.9% annually from 2011 to 2020, while annual inflation rates were between 1% and 3% over the same period. 

3. Robo-advisor or managed investing account

If you want to invest your $500 in the stock market outside of a retirement account but don’t feel you have enough expertise to make prudent picks, you can turn to an expertly created computer algorithm. Several companies offer so-called robo-advisors, which are automated, online computer-driven portfolio management tools. Investors answer a few questions to share details like their financial situation, goals, appetite for risk, and more. Using that information, the robo-advisor automatically selects a mix of stocks, mutual funds, exchange-traded funds, bonds, and more.

You can also choose to work with a traditional (read: human) team that handles assets under management to create a customized portfolio. Be sure to ask about how the team sets its strategy, the investment products available to you, and details about cost. Some platforms including Titan require a minimum investment of only $100 to get started and charge no performance fees, while others may have higher minimums and fees.

4. Individual stocks or funds

If you’re confident in your market know-how or want to make a bet on a specific company or companies, you may choose to invest your $500 in stocks. You can purchase shares through brokerage accounts, and you can also opt to buy part of a share, called fractional shares. Some stocks and industry sectors are much more volatile than others, so choosing wisely and timing your moves is critical.

Individual stocks are hardly your only choice if you want to dive into the market, however. There are other options including mutual funds, which are professionally managed pooled investments and include multiple types of securities, and exchange-traded funds (ETFs), which track a specific index, sector, or commodity.

5. Cryptocurrencies

If you’re big into Bitcoin, Ethereum, and their thousands of rivals, you might consider using your $500 to buy cryptocurrency. But there’s a big caveat here: You’ve got to have quite the tolerance for risk. The crypto market is incredibly volatile: Bitcoin and Ether both hit record highs in November 2021 and fell about 70% by mid-2022. As with any high-risk investment, the possibility of big rewards comes right along with that potential for big losses.

The bottom line

No amount of money is too small to invest, as individual investors with an extra $500 have many options available to them. Experts recommend that those interested in investing first need a solid emergency fund to cover three to six months of household expenses. Determining personal financial priorities as well as risk tolerance is another important step. From there, investment options range from steadiest to most risky include bonds, retirement accounts, managed investing, individual stocks, and cryptocurrencies.