How to invest $500 to begin building wealth

Melnikov Dmitriy / Shutterstock

By Kevin Mercadante

🗓️

Updated: February 23, 2023

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Partners on this page provide us earnings.

You’d be surprised just how far $500 can go when it’s invested in the right way. Not only is it enough to start growing wealth in a meaningful way, but investing even a small amount can help you build positive investing habits that will help you to reach your future financial goals.

7 best ways to invest $500

It's never too early to start investing for your financial future. Here are seven of the smartest $500 investments that you can make with your $500 right now.

1. Invest with a robo-advisor

If you’re new to investing and don’t feel comfortable choosing your own investments, then a robo-advisor is a great place to start. A robo advisor is an online brokerage account that uses a computer algorithm to choose appropriate investments for your portfolio. You can check out our best robo-advisors guide.

When you first sign up with a robo advisor, you answer a series of questions about your investment goals, risk tolerance, annual income and more. Using that information, your robo advisor will build a diversified portfolio with an asset allocation that’s best suited to your situation.

There are plenty of benefits to investing with a robo advisor. The biggest attraction for new investors is that the robo advisor chooses investments on your behalf, rather than having to choose them yourself. And for someone starting from scratch, this factor can have you many hours of research and provide a lot of peace of mind.

Options like Betterment and Wealthfront are excellent robo advisors for investing $500. Both companies charge 0.25% in annual asset management fees for accounts of this size, which is much more affordable than a traditional financial advisor. And each robo advisor also automatically rebalances your portfolio and offers some ESG investing options too.

As for M1, it's an excellent hybrid option that's a mix of a robo advisor and an online broker. You can customize pre-built portfolios for a blend of passive and active investing. And the best part is that you don't pay any annual management fees.

2. Contribute to a 401(k) or IRA

Investing in your workplace 401(k) plan is perhaps the easiest way to start investing, even with a small amount of money. First, your employer sets up the plan on your behalf, meaning there’s very little work on your end required to get started. Some companies automatically opt their employees into the plan, requiring that they opt-out if they don’t want to participate.

Another benefit of investing in a workplace 401(k) plan is that your return is often far greater because of an employer contribution. Suppose your workplace offers a 3% match on your 401(k) contributions; in other words, if you contribute 3% of your salary, then your employer will match your contribution. You’ve immediately earned a 100% return on your investment.

Finally, 401(k) contributions are taken out of your paycheck before taxes, so you’re saving yourself money in taxes by contributing.

While a 401(k) plan is a great place to get started with investing, not everyone has one available to them. In that case, you can open an individual retirement account (IRA), which offers many of the same benefits as a 401(k) plan. IRAs can be pre-tax, as with a 401(k), or after-tax, in the case of a Roth IRA. With a Roth IRA, you contribute money that’s already been taxed, but then you can withdraw your earnings tax-free during retirement.

Because of their tax advantages, 401(k) plans and IRAs are excellent places to start your investing journey. They’ll save you money in taxes, meaning more of your money can stay invested. And because they’re specifically designed for retirement, you can feel confident that you’ll have money waiting for you when you’re ready to stop working.

Find out more: How to invest in an IRA

3. DIY with commission-free ETFs

Many people think they need to hire an investment professional to help them manage their portfolios, but it’s never been easier to manage your own portfolio than it is today.

The first reason it’s so easy to manage your own portfolio is the existence of exchange-traded funds (ETFs). An ETF is a pooled investment that allows you to get exposure to hundreds — or even thousands — of assets in a single investment. ETFs are diversified funds, meaning you don’t have to worry about buying individual stocks and bonds.

ETFs come in many different shapes and sizes. You can buy ETFs that represent the entire stock or bond market, or those that represent just a share of it, such as in the case of sector ETFs. These investments are great for a buy-on-hold strategy since you can buy ETF shares and then simply watch your investment grow.

Another perk of ETFs is the way they trade; rather than trading like mutual funds, ETFs trade like stocks on stock exchanges. You can buy and sell shares throughout the day and have more control over the trading price.

Online brokerage firms like  make it easier than ever to trade ETFs by offering commission-free trading. Ally and TD Ameritrade are two perfect examples, and both brokers offer commission-free stock and ETF trading. Ally also has a robo-advisor option you can use and some excellent banking options, like its high-yield savings account.

As for Public, it's a great choice if you also want commission-free trading and like trading from your smartphone. And it has a neat social investing feature where you can follow other Public member's investments to see how other people are investing.

Check out our best online stock brokers guide

4. Buy fractional shares of stocks

Through fractional share investing, $500 can go a long way towards building a diversified portfolio of stocks. Previously, if you wanted to buy a larger company's shares, ordinarily that would cost hundreds to thousands of dollars per share. That means that your whole $500 investment would be swallowed up with maybe one or two FAANG stocks.

But with fractional shares, you can get a small slice of a share for as little as $1 to $5 dollars per stock. While it might not seem like much at first glance, these fractional shares come with a lot of benefits. They can help you buy as much as you can afford and not anything else, net you compound interest over the long-term investment cycle, and offer sweet, sweet diversification within your portfolio.

Some of our favorite stock brokers and investing apps that support fractional shares include:

• Fidelity
• Public
• Robinhood
• Webull

5. Buy bonds

A bond is a type of fixed-income security that’s essentially you lending money to a government entity or corporation. In return, the bond issuer makes regular interest payments to you, the lender. When the bond reaches maturity, the corporation or government entity returns your principal investment.

Bonds don’t get as much attention as stocks in investing conversations for two key reasons: they have historically lower returns than stocks and they aren’t as volatile. In other words, many investors find bonds to be boring. In reality, bonds are an important part of a well-diversified portfolio.

The very characteristics that make bonds seem less exciting to investors are precisely the reason they have a place in your portfolio. While they don’t have the same historical returns as stocks, bonds are less volatile, so you’re less likely to lose money, which makes them valuable for capital preservation.

Another benefit of bond investing is that they generate fixed-income. While some stocks pay dividends, often the only way you make money is through capital gains. However, with bond investing, you’ll get regular interest payments during the life of the bond.

There are several ways to buy bonds, including directly from the U.S. Treasury Department or through your brokerage account.

6. Invest In real estate

Although it might sound surprising, another way to invest $500 is to invest in income-generating real estate. And thanks to real estate crowdfunding sites, it's easier than ever to get started.

Real estate crowdfunding sites help groups of investors invest in commercial and residential real estate. As a shareholder, you typically earn quarterly or annual dividends and can potentially earn from property appreciation as well.

Many crowdfunding sites have high investing minimums and can even require being an accredited investor. But some companies that let you invest in real estate with small amounts of money include:

• Fundrise: Our favorite crowdfunding platform that has a $10 investing minimum and only charges 1% in annual management fees.
• Arrived Homes: A newer player in the crowdfunding space that lets you invest in residential real estate starting at $100.
• Groundfloor: This debt-based investing platform lets you fund real estate development loans starting with only $10.
• HappyNest: Another new crowdfunding company with a $10 investing minimum.

You can learn more about the best real estate investing platforms for non-accredited investors; these companies let you invest in real estate without much capital.

This is a testimonial in partnership with Fundrise. We earn a commission from partner links on Investor Junkie. All opinions are our own.

7. Pay off debts

You might be confused why we’re talking about paying off debt in an article about investing. But the truth is that sometimes paying off debt yields far greater returns than investing can.

Consider for a moment that at the end of 2021, the average credit card interest rate was 16.13%; for some cardholders, rates can easily exceed 20%. But according to the Securities and Exchange Commission, the average annual stock market return is closer to 10% (and more like 6% or 7% when you account for inflation). Based on these numbers, you could actually see a greater potential return on your money by using it to pay off debt rather than invest.

While credit cards have notoriously high-interest rates, that isn’t the case for all types of debt. For mortgages, auto loans, and student loans, it’s not uncommon to have interest rates below 5%. In those cases, when the rate is lower than the average stock market return, you might decide to divide your efforts between both investing and paying off debt.

Ultimately, whether you invest while paying off debt is a personal decision. You can compare stock market returns to your current debt interest rate to see which makes the most sense on paper. For many people, debt is also a financial decision and eliminating that emotional burden may be more important than their potential investment returns.

Find out more: 10 ways to get rid of credit card debt faster

Beware of investing $500 to make money fast

When you’re first learning about investing, it’s easy to get caught up in the current trends of day trading, cryptocurrency, meme stocks and more. Much of what you’ll read about are current trends that are designed for short-term investing. However, most people really need a long-term investing plan.

To build your long-term investing strategy, tune out the noise and focus first on what you need. Start by figuring out what your investing goals are. For many people, investing is a means to an end to retire comfortably, though you may have loftier investing goals such as achieving FIRE (financial independence, retire early) or building a business. Keeping your goals in mind will make it easier to build a strategy that works.

Once you’ve identified your investing goals, you can use that information to build your investment plan. Start by matching your investment portfolio to your time horizon and risk tolerance. If you have many years until your investing goal and a normal tolerance for risk, you can afford to take on a bit more risk in your portfolio. But if you have a low tolerance for risk, you’ll want to focus on low-risk investments. As your time horizon shortens, it’s generally recommended that you reduce the risk in your portfolio.

The two other keys to long-term investing are diversification and not timing the market (as the saying goes, time in the market is better than timing the market). In other words, investing consistently over a long period of time will yield better results than correctly guessing what the market will do. Building a well-diversified portfolio will help you achieve returns that are comparable to the market, but without putting all of your eggs in one basket.

Read: Long-term investment strategies

How much will I make investing $500 right now?

One of the factors that hold so many people back from investing is feeling like they don’t have enough money. But the good news is that even just a small amount of money in your budget can have a significant long-term impact when invested.

So exactly how far does $500 go when invested?

If you have just one lump sum of $500 and invest it in an asset with a 10% annual return, then in 10 years, you would have nearly $1,300. If you were instead able to invest $500 per year, your 10-year returns would be more than $8,000. And if you were able to invest $500 per month with a 10% annual return, you would have nearly $100,000 after a decade.

The great news about investing is that you can take advantage of compound interest. In other words, the money you invest earns money. And in future years, the money you’ve earned on your money also begins to earn money.

Let’s use a simple example to show how compound interest works: Imagine you put $1,000 into an investment with a 10% annual return. After one year, you would have $1,100 invested. In the second year, rather than earning a 10% return on your initial $1,000 investment, you’re earning a 10% return on the entire $1,100 in your portfolio.

As time goes on, compounding has an even greater effect on your investments, and the amount in your portfolio can increase exponentially from the amount you initially invested, even if that initial investment was only $500.

Find out more: How does compound interest work?

Bottom line

A $500 investment may not seem like a lot, but it can go a long way over time. The most important first step is getting started and building the habit of consistent investing. Your $500 investment will continue to grow and, when you have more money to work with, you can improve your portfolio and watch your investments grow even more quickly.

Remember, you don’t have to wait until you have $500 to start investing. Many brokers allow you to get started with as little as $10, and thanks to compounding, every small amount makes a difference.

Related Articles:

• How to invest $5,000
• How to automate your investments

Moneywise receives cash compensation from Wealthfront Advisers LLC (“Wealthfront Advisers”) for each new client that applies for a Wealthfront Automated Investing Account through our links. This creates an incentive that results in a material conflict of interest. Moneywise is not a Wealthfront Advisers client, and this is a paid endorsement. More information is available via our links to Wealthfront Advisers.

Kevin Mercadante Freelance Contributor

Kevin Mercadante Freelance Contributor

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com.

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