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How to Invest Your First $500


How to Invest Your First $500One of the best things you can do to build wealth is to start investing as early as you can. This is easy in theory, but it is more difficult in practice. Someone new to investing wouldn’t know where to begin. I sure didn’t when I was young. I started investing by going to the “free financial advisor” at my old bank. The so call advisor sold me some loaded funds that performed worse than cheap index funds. Loaded fund means you pay a fee upfront and the financial advisor makes a commission from the sale. That was a mistake I don’t want any new investor to repeat. It should be easier to invest your first $500 and that’s why I’m writing this post. Also, I need to help our son make his first investment in the stock market.

Start investing early

There are 2 big advantages to investing early. First, your investment will have more time to compound. The power of compound interest becomes exponential only after many years. The earlier you start investing, the more time your investment has to grow. Second, you learn many valuable lessons and make many mistakes when you invest. It’s better to get these mistakes out of the way when you’re young and don’t have much money. I didn’t lose much money when I made the mistake of investing with a bad financial advisor because I didn’t have much at that point. If I waited until I was 40 to make the same mistake, it would have been a much more expensive lesson.

That’s why I’m starting our son off early. Earlier this year, I hired our son to be a model and photographer for Retire by 40. All of his pay goes straight into a Roth IRA for minor. After 6 months, his account has about $500 and we can start investing in earnest.

Before investing your first $500

Investing is actually easier for RB40Jr because his situation is very simple. He lives at home and doesn’t have any expense. He’s just a kid. Life is easy and he can invest his $500 without any worries. Most adults have more complicated lives. Before investing that first $500, you need to make sure to do these first. 

  1. Employer sponsored 401k. Many employers have a 401k plan and most will match a certain percentage of your contributions. This is 100% guaranteed return. It is pretty much impossible to get this kind of return by investing. You’ll also get some tax deduction as a bonus. That’s why I love my 401k. Employer matching is a great bonus and everyone should take advantage of it.
  2. Pay off high interest debt. If you have high interest debt, pay those off first. I’m thinking about credit cards in particular. At the time I’m writing thi, the typical credit card interest rate is 14-22%. This is very high and it’s a huge drag. Most investors can’t generate this kind of return. It’s better to pay off those high interest loans first, then invest.
  3. Invest in yourself. The best thing you can invest in when you’re young is yourself. If you can improve your earning potential, then don’t hesitate to invest in yourself. Of course, the easiest way to improve yourself is to read a lot of books and blogs. Those aren’t too expensive.
  4. Emergency fund. Lastly, everyone needs to set some aside some cash to deal with emergencies. You don’t want to invest $500 only to find out that you need it next week. I think you need at least $1,000 in your saving account as a cushion before starting to invest. 

Investing your first $500

Once you’re ready to invest your first $500, there are some choices to make.

What kind of account?

Basically, there are 2 choices here – a Roth IRA or a taxable brokerage account. I choose the Roth IRA for our son. If you’re young, the Roth IRA is a great choice. RB40Jr make so little income that he won’t have to pay any income tax. He can invest this income in a Roth IRA and avoid tax on the earnings too. This is awesome because tax can take a big bite out of investment gains. 

For younger folks, I think Roth IRA is the way to go because they’re typically in the lower tax brackets. Also, the investment will have a lot more time to compound. When you go with the Roth IRA, you don’t have to pay any tax on the gains. That’s perfect for young folks. If you’re older or need to be able to access the money, then it’s a toss up.

Where to open a Roth IRA?

For RB40Jr, I choose Fidelity because they offer a Roth IRA for minors. This account can be open and manage by an adult relative on behalf of a minor earning income. I already have an account at Fidelity so that was an easy choice to make. Many brokerages offer a custodial IRA so give them a call and check. 

For adults, I highly recommend Firstrade. They are a discount brokerage with very good service and low transaction fees. I wrote a guide on how to start contributing to a Roth IRA featuring Firstrade a while back.

Beware transaction fees

With $500 to invest, you need to pay attention to the transaction fees. Discount brokerages are much more affordable than when I started investing, but I still don’t want to pay the transaction fee with this amount of money. RB40Jr makes about $100 per month. If he has to pay $10 in transaction fee, that’s a 10% drag on his returns. That transaction fee will offset the gains from the investment. 

That’s another reason why I recommend Fidelity and Firstrade. Fidelity offers many commission-free ETFs from iShare. Firstrade has more than 700 commission-free ETFs. This is perfect for new investors who want to avoid commission fees.

*I just found out that Vanguard is getting rid of commission fees for most of their ETFs in August. That’s great news. However, I believe they have some annual maintenance fees when your account is small. 

What to invest in?

I’m a big believer in learning to walk before you run. New investors should invest in core asset classes before getting into more complicated investments. You really can’t go wrong by investing in a solid passive index fund. Just keep adding to that investment every year and you can’t lose.

For RB40Jr, I choose IJR – iShare core S&P small-cap index fund.

This fund gives him the exposure to US small cap stocks with no commission fees. I choose small cap instead of a broad-based US stock index fund because it has more growth potential. Small cap index fund is more volatile in the short term, but it should work out well in the long term as long as he keeps adding to the investment every month.

Fidelity also has these iShare funds available.

  • IVV – iShare Core S&P 500 ETF
  • IJH – iShare Core S&P Mid-Cap ETF
  • IEFA – iShare Foreign Equity Large-Cap ETF

We’ll probably add these to balance out RB40Jr’s account later. For now, we’ll just focus on adding to IJR. I don’t think you can go wrong with any of these if you’re young.

How would you invest your first $500? What would you recommend for your kid?

Sign up with Firstrade to start investing now. They offer 700+ commission-free ETF so you can start investing without having to worry about transaction fees. Don’t wait.

Disclosure: We may receive a referral fee if you sign up for a service through a link on this page.

Photo by Pepi Stojanovski

One of the best things you can do to build wealth is to start investing as early as you can. This is easy in theory, but it is more difficult in practice. Here how our son will invest his first $500.
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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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{ 59 comments… add one }
  • Mr. Tako July 16, 2018, 12:21 am

    We’re in full agreement Joe! Start ’em young!

    I recently spent a bunch of time researching which was the best account for kids to get started investing — Either a custodial brokerage account or a Roth IRA seemed like the best way to go.

    Both of my kids are invested in a Fidelity S&P 500 index fund. It’s not a lot of money, but seems like a decently simple, low-cost way to get started.

    • retirebyforty July 16, 2018, 9:17 am

      That’s great! Did you get a custodial brokerage account for the kids? Is there a transaction fee for the Fidelity S&P 500 fund?

  • Half Life Theory July 16, 2018, 2:16 am

    Looks good Joe… How i wish i knew this amazing info in my early 20’s. Start young… invest as early as possible in low cost ETF’s or index funds…. sit back and relax.

    I turn 30 in a couple months…. i’s probably be sitting on a cool mill by now lol. Cheers!

    • retirebyforty July 16, 2018, 9:47 am

      I wish I knew too. I wasted a lot of time chasing performance when I was young. It would have been much easier to start with the basics.

  • Ernie Zelinski July 16, 2018, 2:23 am

    Being single, I have no children. But if I had kids, I would emphasize that they should not only learn how to save but also how to give to charities. Even when I lived under the poverty line, I would still try to give up to $500 a year to charities. Nowadays, I give a lot more. In 2017 I gave $6,870. In 2015 I gave $27,450. For 2018, I will give about $20,000. I believe that being able to generously give to charities will make you much more prosperous and free in the long term. Great things will come back to you from others which will add to more prosperity for youself.

    For example, a week ago I discovered that “How to Retire Happy, Wild, and Free” was mentioned in last Monday’s “Wall Street Journal” print edition with this title and subtitle.

    The Financial Books That Should Be on Your Summer Reading List
    From “Aesop’s Fables” to “How to Retire Happy, Wild and Free,” here are recommendations from financial planners.


    I couldn’t read the article because I don’t have a subscription.
    Nonetheless, the mention of the book resulted in at least 100 extra copies of the ebook editions being sold and likely 400 to 500 copies of the print edition for additional profits to me of around $5,000 Canadian.

    I went to the trouble of finding out the financial advisor who recommended my book in the WSJ article and sent him a thank you card along with two autographed copies of my other books. The cost was over $50 but it will come back to me in the long term.

    Bottom line: Learn to give generously and teach your kids to give generously. That will make them much more prosperous and free in the long term.

    • retirebyforty July 16, 2018, 9:48 am

      Thanks for sharing. Giving is a weak point for me. I will keep working on it.

    • David @ VapeHabitat July 23, 2018, 7:22 am

      I invested my first $500 on Amazon business of goods from China. It failed 3 months after. Still don’t know what I did wrong

  • Michael @ Financially Alert July 16, 2018, 2:32 am

    My daughter is finally old enough to grasp the basic concept of saving. So, we recently put her birthday money into a 1-yr CD @ 2.5%. She’s excited to watch it grow over the year and once she’s old enough to grasp the concept of investing, we’ll move it over to a nice index fund.

    • retirebyforty July 16, 2018, 9:48 am

      Great! Our son doesn’t think much of interest at this point. He’d rather have the cash in his piggy bank. We’ll work on that. 🙂

  • Tom @ Dividends Diversify July 16, 2018, 4:06 am

    Hi Joe. Starting early is as important as any concepts in retirement planning from my perspective. I recently got my 25 year old niece started in the Vanguard High Dividend Yield ETF (VYM). I threw in $250 to add to her own money, suggested she reinvest all dividends and add more money as she accumulates it from her job after maxing out her 401k. Tom

    • retirebyforty July 16, 2018, 9:50 am

      That’s a great gift to your niece. She’ll learn many lessons from investing at a young age. Having some of her own money at stake will increase her interest level.

  • Lily | The Frugal Gene July 16, 2018, 4:26 am

    When Soap was a baby, her parents put in 500k in a trust account for her and another 500k for her sister. Now it’s grown to almost 5 million each so yes I say starting early is super important. Right second to teaching them about saving and finances.

    I have my IRA with Fidelity and never had an issue. They processed my paperwork fairly quickly.

    • retirebyforty July 16, 2018, 9:51 am

      Wow, that’s awesome! I wish I have a trust fund. 🙂
      I think you’re right. The first lesson needs to be even more basic. They need to learn how to take care of themselves.

  • Xrayvsn July 16, 2018, 4:47 am

    This is exactly what people need. Lot of people don’t invest because they think you have to have a lot of money to start out with.

    The key is to get into the habit early and build momentum. Keep adding to the pile and soon you have capital working for you instead of the other way around. Time is the best ally using compound interest as the weapon of choice

    • retirebyforty July 16, 2018, 9:52 am

      It’s amazing how much an extra 10 years will help. The earlier you start, the better.

  • Ms. Frugal Asian Finance July 16, 2018, 5:56 am

    Thanks for the great tips, Joe!

    I’ve read a couple of articles about investing, but I have to admit I’m still a bit hazy about what it actually is and how to invest in index funds and such.

    I like that you advise people to pay off their debt and invest in themselves before they want to allocate the $500 somewhere. Some people think investing in themselves means spending hundreds or even thousands of dollars on a course. I think those courses are valuable. But as you mentioned there are cheaper (if not free) ways to do that as well (i.e. books, blogs).

    Great real life example for a newbie investor!

    • retirebyforty July 16, 2018, 9:55 am

      I’m a bit hazy on how to invest in yourself. For young folks, it’s pretty simple. You can take courses or classes to increase your employability. For older people like me, it’s a bit more complicated.
      I know you aren’t really into stock market investing, but you should invest a bit to diversify. Good luck!

      • Ms. Frugal Asian Finance July 17, 2018, 8:49 am

        I will definitely talk to Mr. FAF about that after we pay off our mortgage and such. He has stocks with his company (which are doing pretty well) but wants to sell them. And I’m like “Nooo, we need to diversify!” >_<

  • Accidental FIRE July 16, 2018, 6:03 am

    I didn’t know Fidelity had Roth IRA’s for minors, great tip Joe!

    • retirebyforty July 16, 2018, 1:01 pm

      I think that’s a great idea if you have a business. That account will have a ton of time to compound. It’ll be great.

  • Angela @ Tread Lightly Retire Early July 16, 2018, 6:40 am

    The thing I like best about this money being in a Roth versus just a taxable custodial account is that it’s money he’s “earned” (albeit just from pictures) versus a straight gift from you. As he gets older, he’ll have more ownership over the account I think.

  • David Michael July 16, 2018, 8:00 am

    I suggest something easy like the Vanguard Target Funds. Just keep adding to your account and they do the rest for you. No worries about rebalancing.

    • retirebyforty July 16, 2018, 1:02 pm

      The problem with Vanguard Target Funds is that they have a pretty high minimum. I think $3,000.
      I’m not sure if they have an ETF equivalent.

  • Susan @ FI Ideas July 16, 2018, 8:01 am

    Oh, to be young again! I truly admire the way you are coaching your son with work and investing. I think it is interesting that you have chosen the small cap index. I agree that long term it should outperform, but for a first investor, it might make a newbie nervous if they look at comparisons with the whole market. Also, I wonder if you are dollar cost averaging or investing the entire $500. That would be another thing for a newcomer to do, so that as the market is scary, purchases on different days would smooth things out. Yeah, I know it is going to be invested for a really long time, but a newcomer who is developing an interest in finance will check it often. Don’t we?

    • retirebyforty July 16, 2018, 1:04 pm

      I’ll invest the entire $500 and dollar average in every month. That’s the beauty of the commission free ETFs.
      I think you might be right about small cap. It’s probably better to just go for the S&P index when starting out.

  • natasha July 16, 2018, 8:03 am

    Do you have any knowledge about the investment apps Acorn or Stash and if so, how do you feel about them for people who don’t have a lot of money but are looking to start investing little by little?

    • retirebyforty July 16, 2018, 1:10 pm

      I think Acorn is good if you really don’t have much to invest. It’ll at least get you started. You really should focus on increasing your income, though. That will give you more money to invest.

  • Helen July 16, 2018, 8:42 am

    Hi Joe, very good information for starters. The hardest part is to start investing. Yeah, Fidelity is a decent company to invest with. You mentioned about the “free” financial advisor of the local bank. Those people are everywhere, banks, insurance companies, etc. People got to be very careful when someone claims the service is “free”. The truth is, nothing is free.

    • retirebyforty July 16, 2018, 1:11 pm

      Right, the “free” advisor turned me off financial advisor forever. Terrible guidance.

  • Mrs. Groovy July 16, 2018, 12:03 pm

    This is such great, actionable advice! Like Angela, I think it’s wonderful you started RB40Jr with a Roth. You’re providing him with a real life illustration about how work correlates with saving and investing.

    • retirebyforty July 16, 2018, 1:12 pm

      We just need to keep this up until he graduates from college.
      It’s tough being a parent. 🙂

  • Jim @ Route To Retire July 16, 2018, 12:13 pm

    I like this post a lot, Joe! It’s great for kids to start to get a feel for investing even if it’s small.
    We’re in a similar boat with our daughter who just turned 8. She’s saved up around $600 from birthdays and other gifts… and I’m sure the “Daddy Match” has helped that quite a bit.

    For now, we just have it in an Ally account, but I’d like to start doing the Roth as well. I’m hoping to do something similar with paying her to do some work for the site or one of my other side hustles. I just need to actually make it happen at some point soon.

    — Jim

    • retirebyforty July 16, 2018, 1:13 pm

      Yeah, you should get started. The earlier, the better!
      Our son likes to keep his money in our safe. He doesn’t quite trust the bank yet. We’ll have to convince him soon… 🙂

  • Tawcan July 16, 2018, 2:22 pm

    Great write up Joe, very informative. Maybe I will borrow your idea and write a Canadian unique version in the future. 🙂

  • Dr. McFrugal July 16, 2018, 2:53 pm

    This is a good thought exercise. I am thinking about starting a brokerage account for my daughter. And when she starts making money, I’ll get her started with a Roth IRA! 🙂

  • GYM July 16, 2018, 3:04 pm

    We are mainly indexing our kid’s account too. It’s the best way to go. $500 can go a long way when you have time on your side!

    • retirebyforty July 18, 2018, 10:57 pm

      Right, let’s keep it simple for them. They can make complicated investments later.

  • Steve @ familyonfire.org July 16, 2018, 10:50 pm

    Starting as early as possible and educating kids is very important. But at the same time I also want our kids to understand that having money doesn’t mean than can spend it all at once so we are working on budget plans and savings strategies (including how to boost earnings potential through chores).

  • Cubert July 17, 2018, 3:20 am

    Excellent advice, Joe.
    I’ll have to reach out to you when my blog (if my blog) gets to the point where it makes sense to set up the modeling for hire arrangement with my kids. I have to believe that’s a worthwhile tax mitigation strategy?

    • retirebyforty July 18, 2018, 10:57 pm

      I don’t think it’s a big deal for tax mitigation for the blog. It should be a good benefit for our son, though. Compounding will make a big difference with 10 extra years.

  • Buy, Hold Long July 17, 2018, 5:41 am

    Fantastic work, we all need to start young and if you can help them either financially or with knowledge then it will help them in the long run. Cheers

  • Mrs. 50 @ By50Journey July 17, 2018, 2:33 pm

    Great tips. I didn’t know that Fidelity offered Roth for kids. And there’s no minimum to open. I’ll have to look into that.

  • Lazy Man and Money July 17, 2018, 6:17 pm

    I went with a Robinhood account in my name. I couldn’t open an Roth IRA because the money was given to them for birthdays and such instead of it being earned. The nice thing about the Robinhood account is that there are no commissions. That’s great when we are dealing with such small amounts like $500 or so.

    I’ve had the money in there for a couple of years, so the money has done well with the markets. Both kids have a very good start considering they are so young. However, as you say, it’s not like they’ve got big expenses. Well, their Pokemon budget is exploding lately.

    • retirebyforty July 18, 2018, 10:55 pm

      I don’t know if Robinhood is going to last. We’ll see how it goes. I like them. 🙂
      Our son likes Lego. Those are very expensive too. We usually wait until Christmas.

  • AA40 July 17, 2018, 7:01 pm

    These Ishares ETF are the ones I use as well comission-free at Fidelity. They’re great and the MER are very low..lower than Vanguard actually. I just ise ITOT instead of IVV for broader exposure to the market. Great article.

  • David @iretiredyoung July 17, 2018, 7:42 pm

    My kids inherited a small amount from their grandmother and have put it into a Vanguard ETF. This is in the UK and it’s within an ISA account which means their returns are tax free. They’re aged 22 and 19, so it’s a good time to get into the saving and investing habit.

    • retirebyforty July 18, 2018, 10:54 pm

      That’s great! They’ll learn about investing at a young age. Tax free is a big bonus.

  • Dividend Portfolio July 17, 2018, 10:08 pm

    Good analysis of how to invest $500. One brokerage I would recommend is M1 Finance. They are a newer broker, but also have $0 commissions, and automatically rebalance the portfolio with every contribution. Probably something worth checking out.

    In any case, I think investing in an index fund is a great way for a young person to start. You get instant diversification and it helps keep you out of significant trouble, trying to pick the next hot stock.

    • retirebyforty July 18, 2018, 10:53 pm

      I’ll check it out. Usually, these new brokerages with no commission don’t last.

  • Steve July 18, 2018, 8:04 am

    All great advice, especially on investing for your kids. I think it’s great that you’re investing for your son. I know he’ll appreciate that as he gets older. I’m trying to do the same for my boys.

  • CC July 18, 2018, 9:40 am

    Great article! Do you know which index funds that are available at Vanguard that do not have a minimum investment of $3,000 or $10,000? Thank you.

    • retirebyforty July 18, 2018, 10:52 pm

      I read that most of the ETFs won’t have transaction fees starting in August. I’d go with those instead of mutual funds when you don’t have a lot of money.

  • Melissa July 18, 2018, 5:54 pm

    How do you talk to your son about this? Or are you just taking the money and putting it away for him? I have a 5 year old and wanted to do something similar but I’d like her to be involved. I am nervous that shell say she wants to buy an elsa doll instead ha.

    • retirebyforty July 18, 2018, 10:51 pm

      I told him I’ll pay him $5 when I use his photo on my site. But I’ll just invest it. He doesn’t understand it completely, but he likes the idea. He’s 7 so he’s a bit older.

  • FIRECracker July 21, 2018, 9:27 am

    “Investing is actually easier for RB40Jr”

    Interesting. I wonder how you get across the idea of “investing” to a kid? As a kid, it’s harder to see long term benefits versus the stuff that they could get NOW. I was talking to a friend and he says it’s a challenging conveying that idea to a kid when all they want to do is spend the $500 now. How did you teach RB40Jr the concept of investing?

  • BusyMom July 23, 2018, 7:06 am

    Wow, that’s young!
    My son has no income yet. Will start as soon as he has one!

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