How to Invest Your First $1,000 and Double Your Money (In Time)

The hardest part of investing is learning how to get started. In this post, I go over exactly what I’d recommend to someone starting today with $1,000 to invest.
Adam

Written by Adam on November 5, 2018. Updated April 24, 2019.
13 min read. Investing. 6 comments.

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The first time I invested $1,000 I remember sitting at my computer with butterflies in my stomach. I had just opened up a brokerage account (a type of account that allows you to trade stocks) and had gone through the slow process of transferring $1,000 from my bank to a cash account in this new place. It wasn’t the best way to invest $1,000 dollars but at least I was getting started.

I don’t remember what I invested in, but I know it wasn’t what I’d invest in now – or recommend for anyone else. In the 12 years since then, I’ve learned a lot – through many failures and successes. Now I have over $1 million that I invest and feel better than ever about the decisions. Here’s what I would recommend for someone starting today.

start_investing

Get Your Financial House In Order

Before making your first investment, there are a number of things I’d do first. When investing one important factor is leaving your money there to grow for a long time. That means that your financial house is in order and you won’t need to withdraw that money in 2 months due to an emergency that comes up.

Create an emergency fund with 3 to 6 months spending in savings. Before making your first investment, calculate how much you spend each month to live. Multiply that number by somewhere between 3 and 6. Use 3 if your job is secure and income stream is reliable, all the way up to 6 if your income is variable or sporadic.

Save up that much money in a savings or checking account. This money isn’t for spending, but in case something goes wrong to prevent you from needing to go into debt. 

I use Simple as my bank account, which allows for my emergency fund to earn 2.02% return – which is crazy good. They also allow for single and joint bank accounts. I have a personal checking account with them, as does my wife, as well as a joint account that we can both see. This makes transferring money around extremely easy.

Pay off high-interest credit card and other debts. In an ideal world, investments may make you somewhere between 7% and 11% a year. If the interest on your debt is higher than this pay it off first! You’ll get a better return on your money for paying off debt than you would be investing it.

After you have an emergency fund and you’ve paid off your high-interest debt, the next step is to find which type of account to invest in.

Choose the Right Account Type

In the United States, there are a bunch of account types to invest in – so many that it can be extremely confusing to someone getting started. When I was starting, I read I should use some specific account type from a blog and it ended up not being the best one for me.

Luckily, someone on Reddit created this image that I absolutely love. It shows an “order of accounts” that you should use from top to bottom. Give it a look over.

Order of Accounts

You’ll see the same emergency fund idea here as above, but then something interesting next before paying off debt – Company 401k up to the employer match.

If you are fortunate enough to work at a company that offers a 401k, it’s worth looking into to see if they offer some kind of employer match.  Typically that works something like this:

  1. You talk to someone in your finance or HR department to open a 401k.
  2. You decide some amount to be deducted from each paycheck that will go straight into this 401k account.
  3. Through the website for the 401k, you decide which funds (stocks, bonds, index funds, etc) you want your money invested in.
  4. Each paycheck that money will be invested!

A 401k account is a tax-advantaged account. That means that the money that’s going into it has not been taxed. You will (most likely) not be able to access this money until you’re 59.5 without paying an early withdraw fee.

This is the best way how to invest $1,000 dollars in my opinion. If your company offers an “employer match”, that means that for every $1 you put in (usually up to a limit) they will also put in free money. This is an absolute must to take advantage of if you can and is the reason why it’s so high on the above chart.

Let’s look at an example. Say you make $50,000 a year and your company matches “50% of your contributions up to 6%”; a common practice. That means that if you decide to contribute 6% of your income ($3,000 a year) they will add in $1,500 to your account too (50% of $3,000).

That $1,500 is like getting a 3% raise! Take advantage of it!

Related Reading
Which Investment Accounts Should I Use?
401k, IRA and Roth IRA Limits for 2018
How to Choose Between 401k, IRA and Roth IRA to Minimize Taxes

What Should You Invest In In Your 401k?

After you’ve set up a 401k you’ll want to decide what to invest in. Which funds your 401k offers will be different than mine or anyone else’s, which makes giving reproducible advice difficult. There are some similar strategies used to decide what to invest in regardless of where:

  • Look at Funds. Take a look at all the funds that are offered in your 401k.
  • Check Fees. Look at the fees associated with them. The lower the fees the better. I’d look for a fund with a fee under 0.20%.
  • Find an index fund. An index fund invests in many (usually thousands) of individual companies. 
  • US Stock Fund. The US is the largest market in the world. Look for a fund that is in the category of “US Stock” or “US Large Cap”. 

If you’re like me, your eye will likely be drawn to a fund that has grown the most in the last 12 months. The problem is that’s the last 12 months, not the next 12 months! If you’re looking for how to invest $1,000 dollars and double it, what’s most important is slow and consistent growth. Those funds that are doing great are much more likely to lose half their value too!

If you find a fund that is in the US Stock category and has a very small fee, then it’s probably a good one. It’ll usually have a name like “S&P 500”, “Total Stock Market Index” or “Large Cap Index”. 

Note: If your company offers a target date retirement fund (a fund with a date like “Freedom 2045”) it could be a good one to invest in. From my experience when these are in a 401k they tend to have a much higher fee than 0.20% which would count them out in my book. If your fund has a lower fee then that, it’s worth considering instead of a US Stock Fund.

Choosing which fund to invest in a rather large topic. If you want to dig deeper and develop a broad understanding of how to invest, check out my free email course.

What If I Don’t Have Access to A 401k?

Not everyone works at a company that offers a 401k. For a few years, I worked at a startup that didn’t and had to look elsewhere for the best place to invest. What I found mirrors the chart above – opening up an IRA or a Roth IRA.

IRA stands for “individual retirement account” and Roth means Roth (it’s actually named after the senator from Delaware who introduced a bill for that type of account).

Choosing which one to use can be tricky. If you’re making less than $120,000 a year (filing single) or $189,000 (filing jointly) then the choice is easy: open a Roth IRA. If you make more than that, then your options are limited.

Note: There are cases to be made for opening an IRA and contributing to that – namely because the contribution will be pre-tax, meaning you won’t pay taxes until you withdraw the money. With a Roth IRA, you’ll pay taxes now, but then not need to pay taxes when you withdraw the funds. If you’re juuuust getting started investing and want to learn the ropes, I think a Roth IRA is the safest bet for your first account after a 401k.

Open an IRA or Roth IRA

The decision of where to invest $1,000 can be a tough one. Different companies have account minimums that you’ll need to understand.

I think Vanguard is the best place to invest money. I’m not a paid affiliate or anything – I just think they just are the best – and I’m not alone. Vanguard is The Choice amonst most people pusuing early retirement. That’s where I invest all of my money and I recommend it to others as well.

The reason for this is because Vanguard isn’t a profit-seeking company like Fidelity, T.Rowe Price and everywhere else. Vanguard is owned by its shareholders. If you invest in any Vanguard fund that means you’re part owner. This means that every Vanguard fund charges only what it takes to run that fund – which means you hold onto more of your money.

If you’re wondering “where can I invest in with $1,000 dollars?” then Vanguard is my recommendation.

Vanguard even has a nice Open an IRA account in 3 easy steps page which guides you through the process of opening your first account.

What Should You Invest In?

Most Vanguard funds have a minimum deposit of $3,000 to invest in. That means that in order to invest with them you’ll need $3,000 in your Vanguard account AND allocate ALL of that money to a single fund.

Luckily there are other ways to invest $1,000 dollars, even at Vanguard. The best place to get started is with a Target Date Retirement Fund. Target date retirement funds work like this:

  • You invest in a single mutual fund or ETF (I recommend mutual funds at Vanguard – they’re a lot easier).
  • You pick a date based on the year when you’ll likely retire (you can calculate that using my retirement calculator).
  • Put as much or as little as you want into that single fund (minimum $1,000).
  • That fund, in turn, invests in US stocks, international stocks, and bonds. 
  • The allocation of those three changes over time to be more conservative (less risky) as you get closer to your retirement date.

These funds an amazing way to start investing. You can see which fund will make sense for your date based on Vanguards Target Retirement Funds list.

Your Next $1,000

What’s great about these is that you don’t need to change things over time. Just keep pouring more money into that fund and let Vanguard do the work of adjusting your asset allocation. Once you have another $1,000 to invest just add it to that same account in the same fund!

I’ve run the numbers on target-date funds (specifically at Vanguard) and you can continue to invest in this target retirement fund all way up until you have $70,000 in that account and it’ll still be the best thing you could invest in. After that, there are other investment strategies you can use at Vanguard which will lower your fees slightly.

Other Options

Using a 401k, IRA or Roth IRA isn’t going to work for everyone. If you’re in a super high tax bracket you may need to open a brokerage account (which you can still do at Vanguard) and invest in the exact same target date fund.

Be careful though, if you open a brokerage account you’ll be liable for some taxes each year due to dividends – even if you don’t sell any shares. On $1,000 invested, you may generate dividends of say 2%, or $20. Of that $20, taxes might end up being between $3 and $6.

Another option are robo-advisors – like WealthFront and Betterment. These are another great option to get started. You could open up a Roth IRA or an IRA there and let them decide what you should invest in. The downside is that they’ll take a small fee for their services. Betterment has no minimum account balance, while Wealthfront needs at least $500 to get started. 

That’s not much to start, but imagine if you had $1,000,000 invested. All of the sudden you’re paying $3,000 a year in taxes on dividends. Some of those taxes can be bypassed by investing using tax-advantaged accounts, something I cover in my free Minimal Investor Course.

Recap

Ok, that a was a lot. Let’s review that one more time.

  • Before investing, create an emergency fund with 3-6 months savings.
  • Choose which account type you want use to invest. 401k, a Roth IRA or an IRA are some of the best choices.
  • Open up that account! Either by yourself or with the company you work at.
  • Choose what you want to invest in. Look for something with low fees or choose a target retirement date fund.
  • Once you have more money saved up, consider branching out to invest in other funds!

Where would you recommend someone invest their first $1,000?

Adam

About Adam

Hi, I'm Adam! I help millennials invest to reach financial independence sooner than they ever thought possible. Want to see what you could do to reach FI sooner? You're in the right place!

6 Comments

This is such great advice! The emergency fund is really a necessity

For sure. That can save so much debt down the line.

Great overview, Adam!

Thanks Luxe! I realized looking at all the other articles on this topic they all seem to recommend services that are affiliates. None of these are affiliates, but they are what I’d honestly recommend for someone getting started.

If your employer doesn’t match for their 401k, would you still suggest starting there? Or would you skip to the Roth IRA / IRA ?

Yeah, you got it – if the company doesn’t offer a 401k I’d skip down to a Roth IRA. If you make too much for a Roth IRA, I’d lean towards maxing out a 401k, or trying
a Backdoor Roth IRA conversion if that’s an option. That’s assuming your 401k has some good, low-cost index funds for you to choose from.

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