Have you found yourself $20,000 richer because of a bonus, home sale, inheritance, or other means? If so, congratulations! It is a significant blessing to come into that amount of money. Now is the time to decide how to invest $20k wisely.
Many people think the only way to invest money is through the stock market. While this is undoubtedly an option, many investments can make your money work for you in the long term.
9 Smart Ways to Invest $20k
Here are the best ways to invest $20,000 to build your wealth over time.
- Pay Off Debt
- Open a High-Yield Savings Account
- Put Money into a Retirement Account
- Invest in Real Estate
- Invest with a Robo-Advisor
- Fund a Brokerage Account
- Cryptocurrencies
- Invest in ETFs
- Invest in Stocks
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 can be good, but if you have significant consumer debt, you could do more harm than good by investing your money.
Debt usually incurs 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 carrying that balance.
Even exceptionally savvy investors can’t earn returns like that. By paying off any debt, you actually earn back the interest you would have had to pay, freeing up room in your budget for other things, like building an emergency fund.
2. 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 for financial emergencies or unexpected expenses. 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 covering three to six months of living expenses. $20,000 would make a significant dent in that.
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 needed.
3. Put Money into a Retirement Account
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 2024, the maximum annual contribution for a 401(k) is $23,000 and $30,500 for those 50 and older. The maximum annual contribution for an individual retirement account (IRA) in 2024 is $7,000 and $8,000 for people 50 and over.
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, so you should consider maxing out your contributions at work first.
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, either today or during retirement.
4. 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.
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 with other investors through a real estate investment trust (REIT) or crowdfunding.
REITs are funds or stocks of a real estate company that owns and manages commercial real estate properties. You earn a prorated amount of the profits based on your investment. Crowdfunding, on the other hand, allows you to invest in individual commercial properties with other investors, allowing your $20,000 investment to go much further than it would on its own.
5. 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 complete a short survey providing information about investing your $20k, including questions about your financial goals, risk tolerance, financial situation, ESG (Environmental Social Governance) preferences, and more.
The robo-advisor uses algorithms to select investments that align with your goals and automatically adjusts 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%.
6. Fund a Brokerage Account
Robo-advisors are excellent for beginning investors, 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 managing investments. Previously, you would 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 start, you must 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. Once your account is up and running, you can choose from various investment options like stocks, index funds, exchange-traded funds (ETFs), mutual funds, options, and more.
INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
7. Invest in Crypto
Cryptocurrency is still in its infancy, which means that it has the potential to be highly lucrative. However, you should consider the risks of trading crypto before dropping all or part of your $20,000 into the crypto market.
Cryptocurrency is a new investment product that can potentially have high returns. The crypto market has a $1.73 million market cap. When you compare that to the $2.9 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. Investing $20 grand in crypto is wise only if your investment portfolio can weather the storm.
8. Invest in ETFs
Consider ETFs if you want to diversify your $20k across many investments but don’t have the time or patience to manage it. You can invest in stock or bond ETFs and take advantage of an entire market with a single investment.
ETFs typically target a specific index, and your returns mimic the returns of the entire index. They are actively traded, so you can trade shares throughout regular trading hours or hold onto them long-term to reach your financial goals.
Two popular options are the Vanguard Total Bond Market and Vanguard Total Stock Market ETFs.
9. Invest in Stocks
Of course, a list of how to invest $20k wouldn’t be complete without discussing investing in stocks. Whether you invest yourself using an online advisor or a robo-advisor, adding stocks of individual companies to your portfolio is a great way to diversify and add more aggressive investments to grow your net worth.
The key to successfully investing in stocks is to think long-term. Don’t buy and sell like a day trader. Instead, consider holding them for ten years or longer to ride out the rollercoaster and experience the market’s average returns of 10 – 12%.
How to Choose Your Investments
No two investors will have the same portfolio because everyone has different needs and goals. Here’s what to consider.
Risk Tolerance
Most investments have some level of risk. Determine what you can afford to lose without causing a financial crisis. For example, if you’re closer to retirement than not, you should focus on a more conservative portfolio because you have less time to make up for a loss than when you just entered the workforce. Assess your risk tolerance and create your portfolio accordingly.
Goals
Consider what you want to achieve with your investment portfolio. Are you looking for a considerable amount of money for retirement, or do you have a smaller goal that doesn’t require such aggressive investments but needs something stable?
Timeline
As I discussed above, the more time you have, the more aggressively you can invest, and vice versa. The closer you are to your goal, the less risk you can take because you’ll risk losing everything and not having enough time to get it back.
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 it’s best to diversify. As the saying goes, never put all your eggs in one basket.
You can safeguard your earnings and diversify your portfolio by spreading your money across several investment strategies.
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