So you got your hands on 2 grand. That's great news. Whether you saved up your hard-earned money, were given a generous gift, or you found it stuffed in a forgotten mattress, your newfound wealth is ringing in critical question in your head:
What can I do with $2000 dollars?
Little hint: it's not buying a giant TV (you're welcome, wallet). But you already knew that. That's why you're here. Investing is how one turns a small amount of money into big gains over time.
At Wisesheets, we're going to show you how to get some skin in the game with this basic guide on how to invest $2000 in 2023.
Ready? Let's do this.
Before you invest $2000, consider these factors.
We know, you're excited to start investing, and you want to jump in right away. We get it. But if you take a few minutes to consider the factors below, you'll be better off in the long run. So before looking at investment strategies, you'll want to ask these questions first:
- Are you debt-free? If you have any outstanding debt (i.e., credit cards, student loans, etc.), it's probably best to pay that off first before investing your money. It's hard to make money back if you're shelling out for interest payments.
- Do you have 3-6 months of living expenses in your back pocket? We recommend having an emergency fund on hand in case of any unexpected expenses (job losses, medical fees, etc.).
- Are you ready to commit? Investing isn't something that should be done sporadically. It's important to have a strategy and stick with it. Think about how much time and money you're willing to invest over the long term – the $2000 isn't the end of it.
If you've answered "YES" to all three questions above, you want to think about these things next:
- Your goals and time horizon: What kind of returns are you hoping for? Are you investing for the short, medium, or long term? Your goals will determine your investment strategy, and the time horizon you have for the investment will also be important. For example, if you need the money within five years, you may want to avoid investing heavily in stocks, which tend to fluctuate in value more than other investments, such as bonds. On the other hand, if you need the money in the short term, it may not be a good idea to have to withdraw it when the market is down.
- Your risk tolerance: What's your appetite for risk? Do you want a low-risk investment that will give steady, consistent growth over time, or do you have an appetite for more high-risk investments with potentially higher returns? This will also inform your investment strategy.
- Your knowledge and experience: Are you familiar with investing, or are you a novice investor? If you're new to investing, it may be a good idea to start off with a more hands-off approach. Consider investing in mutual funds or ETFs that diversify your portfolio and reduce risk. Once you've become more comfortable with investing, you can start to pick and choose individual stocks or bonds.
Now that you've considered all the factors above, it's time to move on to the actual investing part.
Pick where you'll invest it: The best accounts for investing $2k
When you've got your money ready to go, it's time to pick the correct account for it. You want to make sure that you're putting your money in an account that offers the best returns and flexibility.
It's a good idea to start with any tax-advantaged accounts before touching a personal or joint account. Here are a few great options for investing your $2k:
- 401(k): A 401(k) plan is a retirement saving account many employers offer. It allows you to save money on a pre-tax basis and potentially receive matching contributions from your employer.
Related: How to Invest In Your 401k [Based on Your Needs]
- Roth IRA: A Roth IRA is an individual retirement account that allows you to save money on an after-tax basis. This type of account gives you the flexibility to withdraw money without tax implications when you reach retirement age.
- Traditional IRA: A traditional IRA is another individual retirement account that allows you to save money on a pre-tax basis, but the money you put in will be taxed when it's withdrawn.
- SEP-IRA: A SEP-IRA is an individual retirement account, but it's specifically designed for self-employed individuals. This type of account allows you to save more money than other accounts and receive tax deductions on your contributions.
- State-sponsored 529 plan: 529 plans are tax-advantaged accounts that allow you to save money for college tuition costs. Depending on the state, you may be able to get state tax deductions for contributions.
- Personal investment account: While this isn't a tax-advantaged account, it's a great option if you want to invest in stocks, bonds, ETFs, and other investments. You can open a personal investment account with most major brokerages.
Once you've decided where to invest your $2k, it's time to think about what types of investments you should consider.
What to invest $2,000 in: A look at your options
There are a wide range of investment options to consider, including stocks, bonds, mutual funds, ETFs, and more. Here's a quick look at some of the top investments to consider when investing $2,000:
Good ol' stocks
One way to potentially grow your $2,000 is by investing in the stock market, but choosing the right stocks can be difficult. Even successful stock picker and value investor Warren Buffett has encouraged people to invest in low-fee, diversified stock funds instead of trying to pick individual stocks and beat the market.
You can use a tool like Wisesheets to study the numbers of a company, track your investments with real-time updates, and monitor their performance to make informed decisions.
Related: How Long Does It Take to Learn The Stock Market? (Answered)
Bonds are loan agreements where one party gives money to another party with the understanding it will be paid back in the future with interest. There are various types of bonds, including government and municipal bonds, which are generally considered less risky investments than stocks. You can buy bonds directly from the government, investment platforms, or discount brokerages.
Real estate can be a risky business, but you can still benefit from the market by investing in real estate investment trusts (REITs), which are companies that sell shares in their various real estate investments. REITs may be included in portfolios created by robo-advisors.
Exchange-traded funds (ETFs) are baskets of equities that can be traded on a stock exchange. They can contain stocks, bonds, and real estate investments, and many ETFs invest in hundreds of equities to minimize risk. Index ETFs mimic a market index like the S&P 500 and can be a valuable part of a balanced portfolio.
If the thought of putting together a balanced portfolio sounds intimidating, you might consider using a robo-advisor, a company that specializes in creating portfolios for investors. Robo-advisors use algorithms to recommend a portfolio based on your goals and risk tolerance.
Mutual funds are a collection of stocks, bonds, and other investments that all fall under one umbrella, making it easier to diversify your portfolio. In addition, they tend to be low-cost and can be a good option for those looking for an easy way to invest.
Keep these best practices for investing $2k in mind
- Keep fees low: Before investing, look at the fees associated with each investment. If the fees are too high, it can eat into your returns and make investing not worth it. One way to keep your investing costs low is to look for low-cost index funds, which are a type of mutual fund that tracks a market index like the S&P 500. These funds have low management fees because they simply follow the index, rather than actively trying to outperform it.
- Start small and build up: If you're just starting to invest, it can be helpful to start small and gradually increase your investments over time. This can help you get comfortable with the process and gradually build your portfolio. For example, you might start by investing $500 per month, and then increase the amount by $100 per month as your confidence and knowledge grow.
- Pay attention to taxes: Don't forget the tax implications of your investments, such as tax-advantaged options like municipal bonds or index funds. In addition, be aware of capital gains taxes on profits earned from selling investments.
- Invest regularly: Investing regularly, also known as dollar-cost averaging, can help to smooth out market fluctuations and improve your chances of success. Consider investing a fixed amount each month to avoid trying to time the market and potentially making mistakes.
- Be patient and don't panic: Investing can be stressful at times, especially when the market is volatile. It's important to keep a long-term perspective and not get too caught up in short-term market fluctuations. Remember that the stock market has historically had an upward trend over the long term, so staying the course can pay off in the end.
So how much can you make by investing $2000?
Our guess is as good as yours. There's no definite answer to this question.
Investing $2,000 can potentially turn into more money over time, but it's important to keep in mind that you can also lose money. For example, between 1950-2009, the S&P 500 stock market grew on average by 7% per year. If you had invested $2,000 during that time, it could have grown to about $5,697 in 15 years. However, past performance does not guarantee future results. To minimize risk and potentially increase your returns, consider having a diversified portfolio and keeping fees low.
Investing $2k may not seem like a lot of money, but with the right strategy, it can be the start of something great. Before investing, think about your goals and risk tolerance, then use that information to evaluate potential investments. Remember to keep fees low and regularly invest to maximize your returns.
Finally, use Wisesheets to create a portfolio of investments that will help you reach your financial goals. Easily add any company you're interested in into a spreadsheet and get the financials and price updates live to study stocks like a true investor! Check it out today.