You've been able to save up $2,000 and now you are looking to see what you can do with the money. Where can you invest the $2,000? Thinking back to when I had my first $2,000, I invested it in an unorthodox way. For example, I used about $2,000 to buy Twix, Gummy Bears, and other candy bars at Costco and then resold each piece for 50 cents. In high school, I carried around two plastic ziplock bags of candies to my classes for a couple of months. At the end of it all, I came out with $4,000 gross revenue. But what are some conventional ways of investing $2,000?
Put it in an Online Savings Account or a Certificate of Deposit
In the heyday, online savings accounts used to offer more than 5% annual percentage yield (APY). At 5% APY, you'd get $100 in interest on a $2,000 investment a year! In 2014, the interest rate dropped to 0.75%. Still, this is much better than putting it in a checking account. At this rate, $2,000 will yield you $15 a year. This is virtually guaranteed, unless of course they decide to change the yield. The amount of risk you take on by putting all of it in a savings account is minimal if you do not take into account opportunity cost.
With certificate of deposits (CDs) you essentially lend the bank money for a set period of time. Usually this is less than 5 years, but can be as short as a month. The longer the term, the higher the APY. In early 2015, the interest rates are around 0.40% to 1% for CDs. Should you withdraw the balance before the maturity date (term of the CD), you would be subject to penalties. You can open CDs up at your local bank branch or at online banks.
Buy Governmental Treasury Bills, Notes, or Bonds
Buying U.S. Treasury securities is a great way to invest for the future. Instead of lending to the bank, you are lending to the U.S. Government, which is usually a safe bet that you will get your initial investment bank plus interest.
The differences between treasury bills, notes, and bonds are the maturity time frames. A treasury bill is a short-term investment that will take no more than a year to mature and interest is "paid" at maturity. For example, you would buy a 52-week bill that pays $1,000 at maturity for $980. After a year you will be paid $1,000 by the government on your $900 investment, which is essentially a 2% APY. Treasury Notes' maturities range from two to ten years and Treasury Bonds' maturities exceed 10 years with interest being paid semi-annually (twice a year) for both types.
You can find the most recent Treasury APY rates at on the TreasuryDirect website. Purchases can also be made via the aforementioned website.
Stash your $2,000 into a Roth Individual Retirement Account (IRA)
The main benefit of a Roth IRA is tax-free income in retirement. The caveat is of course you pay tax now on the amount you contribute to the IRA. This doesn't mean it gets taxed twice. It just means you take after-tax dollars and put it in the account. For example, the paycheck you receive from your employer is taxed and that money can go directly into the IRA. The IRA itself would then have investments in mutual funds, stocks, bonds, etc. Then when you are 59 1/2 you can withdrawal your initial investment and any unrealized gains tax and penalty free.
The maximum you can contribute to the account varies from year to year. In 2015, that limit is $5,500, but you can always find the most updated contribution limits at the IRS website. There are other conditions to consider which include that you can only contribute as much as you've earned for the year. For example, if you earned $1,000, you can only contribute $1,000 to the Roth IRA for the year.
You can open up an IRA at any brokerage account and sometimes even at online banks.
Buy Stock Shares in a Company
With $2,000, you would be best allocating that to no more than two or three stock positions. Trade commissions are around $5 per trade and $10 total to buy and then sell. If you allocate a third of that to a stock then you are already down 1.5% from commissions alone. At an allocation of $1,000 you are down 1% from the on set. Still the growth potential with stocks is enormous compared to that of the savings accounts, CDs, and Treasury securities. However, you also put your money at greater risk. You could potentially lose it all, but there is also the possibility of doubling up over time.
If you qualify and are able to open up a Roth IRA, have decades before retirement, and don't need the cash immediately, a Roth might be a good place to stash your cash. Within the IRA, you can also purchase shares of a company and allow that to grow tax free.
Savings accounts and CDs are best if you think you may need the cash within a couple months or even years. Depending on your time frame, Treasury securities may provide you with better yields than CDs or savings accounts.