The first question to consider is whether you have any obligations on which you are paying interest, such as credit cards. If so, you should pay off these debts because you most likely are paying a higher percent on these obligations than you would earn on an investment. Also before investing, you should have an adequate emergency fund. An emergency fund is money set aside in a readily accessible savings account for unanticipated events such as unemployment, medical bills, or car repairs. A sum of money to cover basic living costs for three to six months is recommended.
If you have reduced your credit card balances and have an adequate emergency fund, you could consider investing the $2,000 in a balanced mutual fund which offers a mix of stocks (high-quality companies that pay dividends) and bonds (investment-grade corporate bonds or federal government securities). Another way to obtain broad diversification with limited funds is to purchase an index mutual fund. Index funds buy all of the securities in an index (for example, Standard & Poor’s 500 stock index), or a representative sample of it, thus providing about the same performance as the index they are tracking, minus fund expenses. Expenses on an index fund are typically very low. It is recommended that you purchase index funds directly from the mutual fund company instead of through a broker to avoid a sales charge.
After the initial investment, you could invest additional dollars on a monthly basis; this would help you dollar cost average. Dollar cost averaging is a technique designed to reduce market risk through the systematic purchase of securities at predetermined intervals and set amounts. For more information on investing, see "Investing for Your Future."
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