How to Invest $1000 Wisely

how to invest $1000 Wisely

In the grand scheme of things, a thousand dollars may not seem like a significant amount of money. But for those savvy Canadians who want to make their money work for them – that is, who want to start investing – a thousand dollars is the perfect place to start. 

It’s a slow start, sure, but as others have said before, a slow start is still a start. To help you put that money to work, here are five great places to invest a thousand dollars. 

1. Invest in your RRSP 

Perhaps the best place to start investing $1,000 is with your registered retirement savings plan (RRSP)

Recall that an RRSP is a government-sponsored retirement account that comes with immense tax benefits. For one, you won’t pay capital gain taxes on earnings made within your RRSP, no matter how much you earn, and your contributions are tax deductible. You can contribute up to 18% of your previous year’s earned income each year into your RRSP, or $29,210 (for 2022), whichever is less. 

Why start with your RRSP? A few reasons. For one, many employers offer group RRSPs with matching contributions. If that’s the case, your $1,000 could turn into $2,000, simply by asking your employer to take $1,000 out of your paycheque. That’s right. You could effectively double your money in a single contribution, if your employer offers this benefit. 

But matching contributions isn’t the only reason to start investing in your RRSP. You might also get a hefty tax reduction, too. The CRA will allow you to deduct your contributions from your taxable income, which could help you cut your tax bill. 

That’s huge. If you contribute enough to your RRSP, you could knock yourself into a lower tax bracket, helping you save an immense amount on taxes. For instance, if you’re an individual who made $50,000 in 2021, you would technically fall into the 20.5% tax bracket for 2021 (though not the tax bracket for 2022). But if you contributed $1,000 of your earned income to your RRSP, you would drop your taxable income to $49,000. That would bring you down to the 15% tax bracket (those who earn $49,050 or below), helping you save on taxes. 

Keep in mind with the RRSP, you contribute before-tax dollars, meaning you’ll pay some taxes when you withdraw money in retirement. The amount you pay depends on your marginal tax rate at the time of withdrawal. Ideally, you won’t be making as much income in retirement as you are now, which will put you in a lower tax bracket. As such, you’ll pay less in taxes on withdrawals — much less than what you would have paid had you not contributed the money.

2. Invest in your TFSA 

An RRSP has one major drawback: you’ll pay taxes when you withdraw money in retirement. The amount you pay depends on your marginal tax rate at the time of withdrawal. Ideally, you won’t be making as much income in retirement as you are now, which will put you in a lower tax bracket, but if you think you’ll be in the same tax bracket in retirement as you are now, you might be better off socking away that $1,000 in your TFSA

Like RRSPs, TFSAs are government-sponsored retirement accounts that come with immense tax benefits. Whatever money you put into your TFSA will grow tax-free, and you won’t have to pay taxes when you withdraw it. In addition, the money you withdraw can be re-contributed to your account the year after you take it out.

If there’s one thing that sets the TFSA apart from the RRSP, it’s flexibility. Unlike RRSPs, which are really designed for long-term retirement savings, TFSAs have no withdrawal restrictions. You can take money out of your account to buy anything, whether that’s retirement, a house, a car, or a European vacation. 

If you have $1,000, investing in a TFSA is a great way to start investing for your future. For 2022, you can put a total of $6,000 in your TFSA, though if you don’t use all that space it will carry over next year. 

3. Invest in a non-registered retirement account 

Of course, you might have already maxed out your RRSP and TFSA. If that’s the case, you can still invest that $1,000 wisely by opening a non-registered retirement account. 

With a non-registered retirement account, you can still benefit from investment earnings gains, though you’ll have to report capital gains on your annual tax filing. You won’t get the same tax benefits as TFSAs and RRSPs, but you can invest your money wisely, helping you outpace inflation.  

Within a taxable brokerage account, you could invest in individual stocks, exchange-traded funds (ETFs), or numerous other types of investments. You’ll most likely open your non-registered retirement account through an online brokerage. Be sure you check the trading fees and commissions on a brokerage account before you settle on one. With Canada’s top brokers, you often pay low trading fees, with no account minimums and ample amounts of research and educational materials available to you.  

4. Build an emergency fund 

Maybe you’re not ready to start investing. Maybe, instead of buying stocks or ETFs, you need to set this money aside for emergencies. If that sounds like you, consider setting your $1,000 into a high-interest savings account (HISA) or an account that’s fairly easy to access. 

While you won’t get the same rate of return on your $1,000 as, say, stock investing, you’ll have a cushion for when things don’t go as planned. You could actually save money by setting this $1,000 aside, as you won’t force yourself to depend on high-interest debt, like loans and credit cards. 

5.  Try GIC-laddering 

If you don’t want to invest your money in stocks or ETFs, but you’re also sick of the meager returns on savings accounts, you could put your $1,000 in a GIC-ladder.  

Recall that a guaranteed investment certificate (GIC) is a popular form of fixed income. You lock your money away for a specific period of time after which you get your initial deposit back plus whatever interest it earned. You can lock your money away for a few months to several years or more. In general, the longer your GIC term, the higher your interest rate. The only problem with longer terms: they can come with withdrawal restrictions or penalties, such as forfeiting interest earned, if you try to cash out before the term is up.

Most people don’t want to lock a $1,000 for five years or more, especially if you need it for emergencies, which is where ladders come in handy. With a “ladder” strategy, you take out multiple GICs, each with different terms. For instance, you could put equal amounts of savings into a six-month GIC, a one-year GIC, a 1.5-year GIC, and a two-year GIC.

After six months, your six-month GIC will reach maturity, and you can access that money. What’s more is that all of your GICs will be six months closer to maturity, meaning you technically have a six-month GIC, a one-year GIC, and a 1.5-year GIC. If you don’t need money from your matured GIC at the moment, you can reinvest it in another two-year GIC. In this way, every six months, you buy a new two-year GIC, and your money won’t stop growing.

Having multiple GICs helps you take advantage of the higher rates on long-term GICs, while also ensuring you don’t lock your savings longer than you can afford.

This can be a lucrative strategy. Just be careful that you don’t get too carried away with it. You most likely won’t earn more money from GIC ladders than stocks and funds. And, if interest rates are low, you might not earn that much at all. 

Foolish bottom line: don’t waste your $1,000

While $1,000 may not seem like a lot right now, it can lay the foundation for a solid savings strategy. Set it aside in an emergency fund, or use it to invest in an RRSP, TFSA, or non-registered account. Above all, keep contributing to this initial $1,000: the more money you put into your investments, the more money you can potentially earn, turning that $1,000 into a solid retirement fund.