Have you found yourself $20,000 richer because of a bonus, home sale, inheritance, or some other means? If so, congratulations! It is a significant blessing to come into that amount of money in a short period of time. Now is the time to decide how to invest that $20k wisely.
Many people think the only way to invest money is through the stock market. While this is undoubtedly an option, there are many investments that can make your money work for you in the long term. Keep reading to learn more about the best ways to invest $20,000 to build your wealth over time.
7 Smart Ways to Invest $20k
- Pay Off Debt
- Put Money into a Retirement Account
- Invest in Real Estate
- Invest with a Robo-Advisor
- Fund a Brokerage Account
- Open a High-Yield Savings Account
1. Pay Off Debt
Are you up to your eyeballs in high-interest debt, like credit card debt? The best use for your money is to pay off your debt first.
Investing in the traditional sense is all well and good, but if you have significant consumer debt, you could be doing more harm than good by investing your money. Debt almost always comes with interest, meaning you will always owe more than you borrowed. If your debt has a high-interest rate, you could lose a significant amount of money per year by investing your $20k.
The math is pretty simple. If your credit card or personal loan debt is $1,000 and comes with an interest rate of 15%-20%, you are losing $150-$200 per year by carrying that balance. Even exceptionally savvy investors can’t really earn returns like that. By paying off any debt, you are actually earning back the interest you would have had to pay and freeing up room in your budget for other things, like building an emergency fund.
2. Put Money into a Retirement Account
One of the best pieces of financial advice is that it’s never too early to start saving for retirement. A retirement plan is essential to ensure you can enjoy your later years without worrying about making ends meet. If you have $20,000 to spare and don’t have lingering debt, the best use for your money is to max out your retirement contributions for the year.
In 2023, the maximum annual contribution for a 401(k) is $22,500 and $30,000 for those 50 and older. The maximum annual contribution for an individual retirement account (IRA) in 2023 is $6,500 and $7,500 for people 50 and over. Choosing which account to prioritize will depend on your investment goals, but maxing out your employee-sponsored retirement account, such as a 401(k), is ideal for most people.
Most employers incentivize employees to contribute to their retirement savings by matching contributions. Typically, employers will offer a 50%-100% match with a maximum contribution of 3%-6% of your salary. This is free money, which is why you should consider maxing out your contributions at work first. If you have trouble paying your bills, you always have the $20,000 to dip into.
If you still have room in your $ 20,000 budget, consider investing the rest in an individual retirement account. The benefit of an IRA over a 401(k) or employer-sponsored plan is that you have more control over your investments. Plus, IRAs come with tax breaks that can benefit you now or in the future.
You have two options for individual retirement accounts: a traditional IRA or a Roth IRA. The difference between the two is the tax advantages you receive. A traditional IRA will exempt you from taxes when you make contributions but will tax you when you begin making withdrawals. A Roth IRA is the opposite; you pay taxes when you contribute but will make tax-free withdrawals during your retirement years. Deciding which is best for you will depend on which of these tax benefits you prefer.
3. Invest in Real Estate
Real estate investing is hot right now. While investing in real estate with little to no money is possible, having $20,000 to throw at a real estate investment gives you a significant advantage. There are several avenues to invest in real estate, but there are a couple of top methods to consider.
The most traditional way to invest in real estate is to purchase a rental property. Rental properties are an excellent way to earn passive income, and having $20,000 to use towards a down payment can help you dive right in. The basic idea is to purchase the property, rent it out, use the rental income to pay the mortgage and save whatever is left. The only downside is that this requires you to manage the property and cover the mortgage on your own dime if the home becomes vacant.
If you aren’t interested in owning a rental property, you can always invest your money in someone else’s through a real estate investment trust (REIT). An REIT is a fund or stock that allows you to invest in real estate. Your money will go towards managing properties, and you will receive cash back as dividends. $20,000 will earn you a pretty penny in investments, but you will face high taxes – some as high as 37% – on REIT dividend earnings.
Want to contribute to a large real estate project directly? You can invest in real estate through a real estate crowdfunding platform. Real estate crowdfunding allows investors to contribute to large-scale real estate projects at a lower initial investment. Platforms like Fundrise enable investors to pool their money toward borrowers on large projects. You can see returns on your investment in the form of rental income and property appreciation.
Real estate investing may be popular, but risks are always involved when investing your money in a project. Be sure to thoroughly research your investment and consider your risk tolerance before you put your money down.
4. Invest with a Robo-Advisor
Some people prefer a hands-off approach to their investments. If you prefer someone (or something) else to do the leg work of maximizing your portfolio’s earning potential, consider investing with a robo-advisor.
Robo-advisors like Betterment are a new type of investment account that has gained popularity with the rise of fintech. When you invest with a robo-advisor, you start by filling out a short survey in which you provide information about how you want to invest your $20k. This survey will include questions about your financial goals, risk tolerance, financial situation, ESG (Environment Social Governance) preferences, and more.
After providing information about how you would like to invest your money, the robo-advisor will use a series of algorithms to pick out investments that align with your goals and automatically adjust them over time. The result is an investment portfolio that is automatically diversified and aligns with your personal financial goals.
The obvious tradeoff with investing with robo-advisors vs. a traditional brokerage is less hands-on personalization of your investments. However, robo-advisors also charge lower account management fees, typically ranging from 0.25%-0.50%. To put that into perspective, you will pay $50 per year on your $20,000 investment if your robo-advisor charges a 0.25% management fee.
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5. Fund a Brokerage Account
Robo-advisors are excellent for investing beginners, but others may prefer a more hands-on approach to managing their portfolios. Consider opening a brokerage account if you want a more personalized investment experience.
Brokerage accounts are a more traditional investment tool that allows investors to have more freedom when it comes to managing their investments. Online brokers like Vanguard have changed the game for managings investments. Previously, you would have to pay hefty fees to a financial advisor to manage your portfolio and provide investment advice. Online brokerage accounts allow you to access various investment products for a fraction of the cost.
To get started, you will need to choose an online broker and open a brokerage account. Most online brokerages have account minimums to open an account, but $20,000 will be more than enough to open a brokerage account. Once your account is up and running, you can choose from a variety of investment options like stocks, index funds, exchange-traded funds (ETFs), mutual funds, options, and more.
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6. Open a High-Yield Savings Account
If you don’t already have an emergency fund, opening a high-yield savings account is a responsible way to invest your $20,000.
An emergency fund is a bank account dedicated to financial emergencies or large purchases that you anticipate in the near future. When the unexpected happens, like a broken down car or a costly home repair, having an emergency fund can reduce the stress of an already frustrating situation. As a rule of thumb, most financial advisors recommend creating an emergency fund that would cover three to six months of living expenses. $20,000 would make a significant dent in that.
Many people are turning to high-yield savings accounts to build up their savings in case of an emergency. High-yield savings accounts allow you to earn a higher interest rate on your savings compared to traditional savings accounts. While high-yield savings accounts have lower rates of return than other forms of investments, they allow you to access short-term funds when you need them.
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7. Invest in Crypto
Cryptocurrency is still in its infancy, which means that it has the potential to be highly lucrative. However, the risks associated with trading crypto should be considered before dropping all or part of your $20,000 into the crypto market.
Let’s start with the pros: cryptocurrency is a new form of investment product, which means it can potentially have high returns. The crypto market only has a $900 million market cap. When you compare that to the $2.3 trillion market cap invested in Apple alone, you realize you could earn a ton by getting in now.
The obvious risk with an investment product this new is the high volatility. Crypto is even more volatile than stock trading. You will likely see enormous swings in your portfolio and even face the risk of exchange collapse. It is only wise to invest $20 grand in crypto if your investment portfolio can weather the storm.
Build an Investment Portfolio
Deciding how to invest $20k is a great problem to have! Any of the above investment options is wise for your newfound wealth.
Investing is the best way to help your $20,000 grow over time, but the wisest course of action is to not go with only one form of investment. As the saying goes, never put all your eggs in one basket.
By spreading your money across several investment strategies, you can safeguard your earnings and diversify your portfolio.