If you’ve got $2,000 saved up, you can buy a bunch of nice things. You could spend it on a fancy computer, a purebred puppy or a flight to some sunny destination.
But as tempting as those things are, I’d consider doing the more “responsible thing” and use that money to start a long-term investment portfolio.
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Who am I to tell you? Well, I’m a finance writer and I’ve learned about responsible investing from personal finance experts. Managing money responsibly is a necessity, not an option, for freelancers like me. It also means I can relate to investing newbies.
I know, I know: Yawn! Investing $2,000 in stocks isn’t as fun as flying to the Caribbean — but hear me out. If you start investing early, you could set up a powerful habit that will save your future self a lot of financial headaches.
The best strategy for you will be highly dependent on your personal situation. Let’s look at a few scenarios to help you start thinking about how best to balance growth and risk.
Scenario 1: Jamal, 28, customer service rep, starting out with just $2,000.
Imagine someone like Jamal, single with a full-time job as a customer service rep. His income is secure and he can cover his rent every month — but he doesn’t have a rainy day fund. He’s wondering if it’s safe to jump into the market with his $2,000 right away.
Some options for investing
In Jamal’s situation, I’d have trouble sleeping at night if the full $2,000 was in the market and I didn’t have an emergency fund, something financial experts prioritize.
So, I’d look into a high-yield savings account and deposit $1,500 in the account with the best rate. This way, I’m preparing for unexpected expenses, such as car repairs or an unexpected job hiccup.
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Then I’d consider dipping my toes into investing with the remaining $500, moving it into a diversified ETF portfolio on a reputable beginner-friendly platform. As a newbie investor, stock picking, day trading or investing in alternative assets like Bitcoin are simply not worth the risk for Jamal.
While this reduces growth potential, it gives me the liquidity and security of an emergency fund and gets me started with a tried-and-true long-term growth strategy.
Scenario 2: Maya, 35, a mid-level software engineer with a stable income, money in an emergency fund and zero debt.
Maya has worked at the same company for seven years and is married with no children. She’s paid off her student loans and has a stable income with a bit of a buffer in an emergency fund.
Some options for investing
In Maya’s relatively stable position, with an emergency fund squared away, I’d feel more comfortable about putting all $2,000 to work in investments.
First, I’d consider splitting the money between a self-directed brokerage account and a Roth IRA. That way, I’d have the flexibility and liquidity of the individual account while prepping for retirement with a tax-advantaged IRA.
I’d invest the bulk of it in diversified ETFs like those that track the S&P 500, but set aside up to 20% of the money to invest in solid mega-cap stocks — stocks with a market capitalization of over $200 billion — in each of the individual account and IRA.
I wouldn’t risk investing in any stock with a market valuation of under $2 billion, or in speculative assets. Sure, I might miss out on higher returns, but I’d also avoid excessive volatility.
This measured mix of ETFs and a touch of stock-picking balances growth with peace of mind.
Scenario 3: Kristen, 21, college student and part-time barista, just learning about investing.
Between full-time studies and part-time shifts at a local coffee shop, Kristen is busy. She’s single and shares an apartment with three roomies. She’s managed to save up $2,000 that she wants to invest.
Some options for investing
Like Jamal, Kristen could do with more of a cushion for emergencies. In her situation, I’d deposit $750 in an FDIC-insured high-yield savings account to have a bit of a buffer when something unexpected comes up.
With that safety net in place, I’d consider investing the remaining $1,250 in diversified ETFs in a Roth IRA to take advantage of the tax benefits now, and the potential of long-term growth.
I’d either set up my Roth IRA with a robo-advisor or in a self-directed brokerage account — depending on how actively I feel like learning about investments and managing my account.
As tempting as it might be to see what meme stocks and altcoins are trending on TikTok and Reddit, I’d do my best to avoid that kind of influence, and the risk of gambling away money I can’t afford to lose.
This kind of strategy may not offer the highest growth, but it is a step toward developing solid financial habits and is an opportunity to leverage the tax benefits of a Roth IRA, and the power of long-term investments.
Scenario 4: Terry, 30, digital marketer with a financial cushion who’s keen to start investing safely.
Terry is doing all right, and doing a lot right from a personal finance perspective. He has already set up an emergency fund and has some retirement savings. Now he wants to start trading in the market, but doesn’t want to get wrecked.
Some options for investing
In Terry’s shoes, with a solid financial cushion, and a sensible awareness of risk, I might invest the entire $2,000 in an individual online brokerage account with plenty of trading and research tools.
I’d put $1,000 in a tried-and-true S&P 500 index fund — a safer strategy. I’d consider taking calculated risks with the remaining $1,000, investing it in solo stocks and maybe Bitcoin. Penny stocks, options and altcoins would be a risk too far.
Alternatively, I could invest in my financial education, using some of the actively traded $1,000 to buy a one-year subscription for high-quality, vetted research sources like Morningstar or Seeking Alpha.
As I develop my investment strategy, I’d experiment safely with a paper-trading platform — which simulates trading without using real money. I’d avoid investing based on free advice, headlines or whatever someone on Reddit says.
While some of my actively managed investments might underperform relative to the market, they’re balanced by the ETF position, which provides a more reliable growth trajectory.
In the meantime, I will learn more about trading and the best approach for me given my risk tolerance.
No amount is too small to invest
There’s an investment strategy for everyone, whether you have $2,000 or $2 million. And the strategies I’d consider might not work for somebody else.
That’s why it never hurts to consult a professional to talk through your own unique situation.
A qualified financial advisor can help you design a strategy that works for you.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.