Should I save, invest or spend $500 right now? 

You got a bonus or worked a side hustle. Or maybe you didn’t spend as much as you thought you would. No matter how you ended up with an extra $500, congratulations! Now the question is what to do with it. The general rule of thumb is to make sure you have adequate emergency savings, and then it’s time to invest and let your money grow. Here’s how to know when to save, spend or invest $500.

When to save $500

Most money experts recommend you build up enough savings to cover three to six months worth of expenses. That amount makes a lot of sense, but with the majority of Americans living paycheck to paycheck, it can also feel pretty out of reach. We recommend that you focus on building financial muscle, even if it’s just a bit at a time. 

When you have extra funds—whether it’s $20 or $500—stash it away until you have one month’s worth of expenses saved up. Make sure you’re storing your money in a high-yield cash account so that it can be earning interest. Rates vary, but as of the writing of this article Wealthfront was paying 2.55%, and Chime was paying 1.50% on cash/savings accounts. 

Where to invest $500? 

If you’ve got a month’s worth of emergency savings set aside, put your $500 to work by investing it. It’s important to remember that investing comes with risk—your investments can both gain and lose value—but financial experts typically recommend you don’t have extra money sitting around not working on your behalf. Here are a few of our Roost-approved investment strategies for your $500:

Invest with a Robo Advisor

First things first: What is a robo advisor? A robo advisor is an automated financial planning service. In other words, algorithms are making the investing decisions instead of a human. The biggest advantage of a robo advisor is that the robo chooses your investments for you and rebalances your portfolio over time. Wealthfront, Ellevest, and Betterment are all examples of robo advisors. 

With Wealthfront, you need a minimum of $500 to open an account and you pay .25% annually (of your money) for the robot to manage your investment. That’s about $0.11 per month or $1.32 per year. What kind of gain will you get? Because investments are not guaranteed, no one can promise you a return (if they do, run away!). However, if you look at the S&P 500 from 1992 to 2021, the average stock market return was 9.89%.

Contribute to a 401(k) or IRA

Investing in your workplace’s 401(k) or an IRA is one of the smartest ways to start investing. That’s because both 401(k)s and IRAs provide valuable tax benefits (more on that in a minute).

The main difference between the two is that 401(k)s are offered through your employer; IRAs are typically opened by you through a broker or bank. IRAs also tend to offer more investments while 401(k)s enable higher annual contributions.

Whichever one you choose (or have access to), they’re both effective investment strategies. Here’s why:

1. Pre-tax dollars – Your contribution is taken out of your paycheck before your earnings are taxed, so you have more money working on your behalf over time. 
2. Contributions – Many employers provide some type of contribution match, i.e. . they also add a certain amount to your 401(k) account based on how much you contribute annually.
3. Compounding – The interest you earn gets added back into your balance. So, essentially, you earn interest both on your original $500 and the interest you’ve earned since you invested it.

DIY with commission-free ETFs

An ETF is an exchange-traded fund. This fund pools investments from hundreds – or even thousands – of assets into a single investment. You don’t have to worry about trying to “pick a great stock”, and the diversity of your investment can be an advantage.  Although we recommend you hold for the long run, you can buy and sell shares throughout the day. Ally and TD Ameritrade are two examples of commission-free brokers for ETF trading. 

Buy fractional shares of stocks

With fractional shares, you buy a small slice of a single share of stock—say Amazon or Disney—for as little as $1 to $5. Robinhood, Fidelity and Charles Schwab all enable fractional shares, which is a great way to get started and focus on a couple of companies. (Normally, $500 wouldn’t buy even a single share of Amazon stock.) 

Bonds

Bonds can be a great diversification strategy for your portfolio. They often provide a lower return but also aren’t as volatile as other investment types. Bonds are a fixed-income security and work like this: You lend money to a corporation or government entity. In return, they pay you regular interest payments.

When your bond reaches maturity (bond maturities typically range from one to 30 years), they pay you back the full principal investment. You can buy bonds directly from the US Treasury or through your brokerage account. 

Fractional real estate

Real estate crowdfunding sites let you buy a fraction of a specific real estate asset—a 500 unit apartment complex in Maryland, for example. If you’re interested in this type of investment, look for an investing platform with low minimums, like Fundrise, Groundfloor or Happy Nest.

Make sure you keep an eye on annual management fees—some are quite high and you may be better off investing your $500 elsewhere.

When to spend your $500

Let’s be clear here: When we say “spend”, we’re not talking about putting your $500 towards camping gear, a new phone, or a puppy.  We’re talking about “spending” to pay down your credit card debt. Why? Well, math. If you’re $500 is earning 8% in the stock market but your paying 25% on your credit card balance, you’re still losing.

If you still want to invest your $500 to get your foot in the door, transfer your credit card balance to a card with an introductory 0% APR. (For example, Wells Fargo Active Cash Card offers 0% intro APR for 15 months on balance transfers.) Or shop around for a personal loan with a lower interest rate. 

Save, spend or invest $500, is it even enough to bother? 

A $500 savings fund or investment may not seem like a lot at first, but thanks to compounding, it will grow over time—a $500 investment at 9% will nearly double in 8 years. Whether you choose a robo advisor or fractional real estate, the most important thing is to simply get started so your money can get to work on your behalf.