The Personal Finance Resource

How to Invest a Small Lump Sum

If you’ve got a small lump sum of $1,000 to invest, you’ve got lots of options. Which one is best for you depends on a number of factors including how soon you need the money and your tolerance for risk.

The first thing you need to do is explore your options and you can use the web to do this. Use a site such as MoneySupermarket to compare rates on savings accounts and certificates of deposit.

You can also use websites to compare other investments, such as individual stocks, mutual funds and bonds.

Where to Invest

Where you should invest the money largely depends on whether you will need it in the near future. If you need to beef up your emergency savings fund, or if you are trying to save money for a down payment on a house, you’ll want to invest the money in a low risk, very liquid account.

A savings account or money market account would be appropriate for this purpose. A CD might work, depending on when you will need the money. If you can tolerate more risk, you could invest the money in a government bond fund.

If you don’t need the money anytime soon, you should look into long-term investments. For example, if you have children, you might consider opening up a college savings account. You can do this on your own or through a 529 savings program, which is offered by the states.

Another good long-term investment for your small lump sum is to put it in a retirement account. The most common way to do this is to open an individual retirement account, which gives your investment special tax treatment.

Considerations

Remember that the riskier the investment, the better the potential for higher returns. On the other hand, riskier investments also have more potential to produce big losses.

If your $1,000 investment is unexpected money you got from an inheritance or gambling win and you can afford to lose it, you might want to roll the dice and go for big returns. On the other hand, if it would cause you problems to lose any of the money, you should stick with low risk investments, which also offer low rewards.

Another thing to consider when investing your small lump sum is taxes. If you invest the money outside a retirement, health savings or college savings account, you will be subject to paying taxes on any gains you get.

Residents of the United Kingdom have a tax-deferred way to save money outside of retirement, called a cash ISA. However, there is no equivalent in the United States.

If you do invest in an IRA, keep in mind that you only defer taxes; you do not eliminate them. With a traditional IRA, you pay taxes when you withdraw the money after you retire. An alternative is a Roth IRA, in which you have to pay taxes upfront on your investment but then never have to pay any taxes on the money in the account, including investment gains, ever again.

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