The $500 Investing Decision That Matters More Than Picking the ‘Right’ One

When you have only a few hundred dollars to put toward your future, it can be tempting to search for the stock, fund or cryptocurrency most likely to take off.

But financial experts said it’s more important to determine whether that money should be invested at all and, if so, where it belongs.

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Decide What Your $500 Needs To Do First

Before selecting an investment, Brian Court, a certified financial planner (CFP) at JustAnswer, said a person’s first few hundred dollars may produce more value by shoring up a financial weak spot than by chasing market returns.

“If you have credit card debt charging 25% interest, paying that down may be a much better financial decision than buying stocks,” he pointed out. In fact, it’s a guaranteed return. Or, if you have no emergency savings, putting that money aside could keep you from going into debt later.

“The biggest mistake is thinking you need to find the next winning stock to get ahead financially,” he said.

Follow a Financial Priority Order

A simple order of operations can help avoid treating every available dollar as stock-market money. Michael Schramm, a certified financial analyst (CFA) and owner of Emotional Finance, would prioritize an employer match to a retirement account comes first then the next few steps:

• Pay off high-interest debt.

• Save more for retirement, such as in an IRA.

• Consider a taxable brokerage account for other goals.

Of course, individual circumstances vary. Someone with an immediate need or unstable income may need accessible cash before taking market risk.

Match the Account to Your Goal and Timeline

Once the basics are covered, decide what the money is for and when you will need it, Court said. A retirement goal decades away may call for a tax-advantaged retirement account, while money needed in the next year or two generally should not be exposed to stock-market volatility.

“Markets can decline unexpectedly, and you don’t want to be forced to sell at a loss,” he said.

Even if you contribute the same amount to two accounts, “you could end up with different after-tax results,” Court said. That’s because eligible Roth IRA contributions are made with after-tax dollars and qualified retirement withdrawals are tax-free. A taxable brokerage account does not offer those same tax benefits.

Ask Whether You Can Afford the Risk

The right investing decision should account for both time horizon and a person’s ability to live with losses, known as risk tolerance. Court suggested a three-question check before putting money into stocks:

• Can I afford to leave this money invested for several years?

• Do I have enough savings to handle an unexpected expense?

• How would I react if my $500 investment dropped to $350?

“If losing that money would create a financial hardship, it probably shouldn’t be invested in the stock market right now,” Court said.

Keep the Investment Simple and Diversified

If the money is truly ready to invest, you don’t need to find a single winning stock. Court recommended diversification through a low-cost index fund or exchange-traded funds (ETFs).

If you think you can outpick the professionals, Schramm urged against it. He pointed out that the S&P 500 has the best track record for performance.

Bottom Line: Build the Habit Instead of Waiting for the Perfect Pick

While one $500 contribution is a good start, once immediate financial needs are covered, Court said, “Developing the habit of investing regularly is more important than trying to predict where the market is headed next.”

Even investing $25 or $50 every paycheck can make a meaningful difference over 20 or 30 years.

Editor’s note: Investing involves risk, including the possible loss of principal. Always consider your individual circumstances and consult with a qualified financial advisor before making investment decisions.

This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.

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