How to Invest 20k
Updated: Feb 24
This article covers how to invest 20k! If someone has $20K sitting around, whether in their savings account or from a gift, it's time to put it to good use. Allowing it to sit accomplishes nothing to help people achieve their goals and has a high opportunity cost.
It doesn't have to be in the stock market, but that is a good option as well. Anyone with $20K can invest it in a variety of ways to get the most out of their money. This article goes over everything people need to know about investing $20,000 in this article. That way, investors have a good financial strategy in place.
Putting Some in a High Yield Savings Account
If an investor doesn't have an emergency fund, this could be a good way to put some of their $20K to work. In case they have an emergency fund, they may rest assured that their living needs can be paid if they are unable to work or lose their job.
Investing in a high yield savings account is a terrific method to keep an emergency fund accessible while still collecting interest. Traditional savings accounts offer lower interest rates than a high yield savings account. As an example, the average annual percentage yield (APY) on a typical savings account is 1.5%.
Because they don't have the overhead costs of having a large bank branch network, online banks frequently provide the best bank accounts. Moreover, because they have lower costs, they can pay higher interest rates than traditional brick-and-mortar banks.
Paying Off Debt
An average credit card account that assessed interest in November 2020 had a 16.28 percent interest rate, according to the Federal Reserve. Credit card debtors may receive a quick gain if they used $20,000 to pay off their debt.
The cost of interest is eliminated when a debtor pays off their credit card amount. If they pay off the card in full, it may even eliminate the monthly payments. Instead of paying hefty interest charges, they should use their recently freed-up cash flow to begin investing every month.
Increasing the Size of the Retirement Account
People who already have an emergency fund and are in control of their high-interest debt should consider putting $20K into a retirement account. Investing in a retirement account may provide them with tax advantages now and in the future. It may also allow money to grow in the long run if they don't need it until they're 59 years old. People must keep in mind that all investments carry the risk of losing money, and previous performance is no guarantee of future results.
Compounding returns could result in tremendous growth if money is set away for longer periods of time. In essence, if they invest $20,000 as a 30-year-old and earn an annual rate of return of 8%, their money can grow to $325,850 by the time they're 65.
An investor has various possibilities for investing $20,000 in a retirement plan, but annual contribution restrictions must be considered. They're unlikely to invest the entire $20,000 in one go.
A person might begin saving for retirement by putting some of their money into a company-sponsored retirement plan. Some employers can match these retirement contributions up to a particular percentage, for example, 3%. They could be missing out on free money if they aren't currently taking advantage of this employment perk.
Furthermore, a 401(k) plan is a type of company retirement account (k). These plans have one of the highest contribution limits in the industry. If an investor is under the age of 50 in 2021, they can contribute up to $19,500 every year.
However, they might not have access to a job retirement plan. They may choose to open various sorts of retirement accounts in this scenario. An individual retirement account is one of the most popular choices. In 2021, they can donate up to $6,000 if they're under the age of 50, or $7,000 if they're 50 or over. Although a regular IRA has no income restrictions, if they choose to form a Roth IRA, their contributions may be restricted based on their income.
Bonds are great investments if the investor requires a specific amount of money at a specific time. They have a stated date when the borrower should pay back the face value of the bond. Bonds, on the other hand, are normally sold in $1,000 to $5,000 denominations, so if the investor has $20,000 to invest, them buying shares in a bond-focused exchange-traded fund can be a better option.
A bond ETF is a collection of debt held by thousands of companies. Bond ETFs collect bond coupon payments and distribute the income as a dividend to the fund's owners. Long-term investors might consider a bond fund like the Vanguard Total Bond Market ETF.
Investing with the Help of a Robo-advisor
If a person wants a more hands-off approach to investing, a robo-advisor like Betterment may be a good fit. Robo-advisors employ technology to help people in setting up and maintaining their assets. They usually accomplish this for a fraction of the cost of an in-person financial advisor.
Many in-person financial advisors only work with clients who have investable assets of $100,000 or more. Minimum balance requirements for robo-advisors are typically substantially lower, and some may not have any at all.
A robo-advisor may normally ask an investor questions to establish their investment style, risk tolerance, and other preferences when they sign up. Then, based on these conditions, it employs algorithms to create portfolio allocations that work for them. Robo-advisors usually invest in exchange-traded funds (ETFs) , which are diversified and low-cost investments.
Robo-advisors may offer additional services to help them in managing their assets and potentially increase their returns. Betterment, for example, provides tax harvesting, portfolio rebalancing, and asset localization services.
Moreover, if an investor wants to invest $20K and doesn't want to manage their portfolio themselves, a robo-advisor could be a good option. It helps them to start investing right away. This allows an investor to keep their money in the market for a longer period of time.
Depositing into a Brokerage Account
If an investor wants more power over their investments than a robo-advisor can provide, one of the top brokerage accounts may be the way to go. Most brokerage firms, including Vanguard, which is recognized for its low-cost investment alternatives, offer these accounts. They can invest in anything the brokerage firm offers with a taxable brokerage account. Stocks, index funds, mutual funds, ETFs, bonds, certificates of deposit, and other investment choices are common. Investors have complete control over what and when they buy and sell.
Annual contribution restrictions are usually not imposed on taxable brokerage accounts. However, they do not provide as many tax advantages as retirement funds. An investor must pay taxes on their dividends and earnings in a taxable brokerage account, so they aren't tax-deferred. Contributing to them does not result in a tax deduction or tax-free income in retirement. Despite the lack of tax benefits, a taxable account could be an excellent alternative if they're interested in investing money for short-term goals. It's vital to keep in mind that investing includes the risk of losing money.
If people want somebody to manage their money for them, they can create an investing account with a financial advisor who provides independent financial advice. Many brokerage firms also provide professionally managed investment accounts. In most cases, these options come with a price tag.
A bank or credit union savings account is a smart alternative to keeping funds in a checking account, which normally yields very little interest. In a savings account, the bank can pay interest on a regular basis.
Savings accounts should be compared because it's simple to figure out which banks give the best interest rates, and they're simple to set up.
An investor shouldn't lose money since their savings account is covered by the National Credit Union Administration (NCUA) at credit unions and the Federal Deposit Insurance Corporation (FDIC) at banks. In the near run, these accounts pose little danger, but investors who store their money for longer periods of time may struggle to stay up with inflation.
Money Market Accounts
Money market accounts are a type of bank deposit that normally pays a higher interest rate than savings accounts while also requiring a larger minimum investment.
Risk: They should look for an FDIC-insured money market account to ensure that their funds are secured in the event of a loss, with coverage of up to $250,000 per depositor, per bank.
Money market accounts, such as savings accounts, pose a long-term danger since their low-interest rates make it difficult for investors to keep pace with inflation. However, in the long run, this isn't a major worry.
Additionally, money market accounts have a high level of liquidity, while federal regulations limit withdrawals.
Getting Started in Real Estate
Finding a way to invest $20,000 in commercial real estate may seem unattainable. It's a popular fallacy that the only way to invest in real estate is to buy it, but this is not true.
A person can invest in real estate in a variety of ways, including through REITs (real estate investment trusts). REITs are real estate investing trusts that an investor can own shares in. As a result, the investor can share in any gains made by the REIT's real estate. Of course, depending on how the REIT performs, they can also lose money.
Several real estate crowdfunding companies also enable investors to begin investing in real estate without having to purchase the entire property. However, several of these platforms only accept accredited investors. They must have a high income or net worth to be considered an accredited investor.
Other crowdfunding platforms, such as Fundrise, make REIT investing accessible to almost anybody. The most basic solution offered by Fundrise takes only a $10 initial commitment.
This fund reinvests whatever dividends it receives, although it is not publicly traded. They might only be allowed to sell back shares to Fundrise on a quarterly basis. Because investors can't sell their shares at any time, this could be a disadvantage depending on their situation. Even so, it's a way to get into real estate investments without having to own the whole thing.
Starting a Company
Starting a business from the ground up can be both exciting and dangerous. People can't put all 20,000 dollars into it; nevertheless, using a portion of it to start a business could be one of the best moves an investor can ever make.
Investors should do their homework before starting a business. They should use the Small Business Administration as a source of information, especially if they need funding. However, they also need to do other research such as, establishing what 'gap' their product or service would fill, analyzing their market, and investigating their competition.
An investor needs a business plan that outlines their short and long-term goals for the company, as well as the structure of the company.
Peer-to-peer lending allows a person to lend money directly to those who need it, and it could be a fantastic way to put some of their $20K to work. Websites like Prosper Marketplace help with this by pairing borrowers with others who are willing to give money.
The websites take a percentage to make the process easier for borrowers while still allowing them to acquire the money they need. These loans typically offer greater interest rates than leaving money in a savings account, but there is a risk associated. An investor could lose their loan if the borrower stops making payments.
If an investor is looking for a novel approach to diversify an already established portfolio, peer-to-peer lending could be a good alternative. However, it does come with its own set of risks that must be factored into its investment strategy.
Those who have a high-risk tolerance might consider investing in cryptocurrencies. Investors are becoming more interested in cryptocurrencies, with Ethereum and Bitcoin leading the way in terms of market capitalization and adoption rate. Bitcoin, the first cryptocurrency, was worth only a few dollars years back, and today, it trades for thousands of dollars. Because there are thousands of cryptocurrencies in existence today, they are a risky investment.
If acquiring cryptocurrencies directly appears to be too dangerous, an investor should consider investing in cryptocurrency or blockchain stocks. Square, for example, has a significant stake in Bitcoin and is developing new cryptocurrency-accepting digital payment systems.
Individual shares of a business can now be purchased more easily than ever before. Individual stock ownership gives an investor complete control over their investment portfolio, allowing them to tailor it to their values and goals, as well as their desired long-term performance.
Because owning individual stocks exposes an investor's portfolio to the success of specific firms, diversifying their stock holdings by investing in at least 10 to 15 equities to begin is a good idea. With $20,000 to invest, each company can cost between $1,500 and $2,000 to start.
The key to investing in individual stocks, like stock ETFs, is to buy and hold them for a long time. Individual stock prices can be erratic, therefore, regardless of how the price varies, investors should focus on the business fundamentals or other initial reasons for purchasing stock.
Investing in Art
Investors are continuously looking for innovative strategies to diversify their portfolios in order to reduce risk and possibly outperform the stock market. This frequently prompts individuals to invest in 'alternative' asset classes such as good wine, precious metals, and fine art.
Art can be a high-risk asset because its value is so subjective. Blue-chip art, on the other hand, such as pieces by well-known artists, tends to hold its value and appreciation over time, exceeding stock indices significantly. Investing in a Van Gogh or a Warhol painting has traditionally been the domain of multi-millionaires, but new platforms are now allowing lower-value portfolios to include shares in blue-chip artworks as well.
The investing options listed are usually the greatest way to put an investor's money to work. However, if an investor is prepared to take a chance or plan ahead for their children's education, there are two more options:
Plans for saving for college. A 529 college savings plan could benefit an investor and their children in the future. They can spend this money tax-free for qualified educational costs when the time comes.
NFTs. A digital asset, such as a music file, a work of art, or a video game item, is referred to as a non-fungible token. They're popular, but they're also volatile. On specialized NFT marketplaces like OpenSea, you can invest in NFTs with cryptocurrency.
What to Think about When Investing $20,000
Before a person invests their money, they should think about a few things to make sure they get the most out of it.
Most Important Financial Goals
Reflecting on their financial objectives should help determine the best use of an investor's mutual funds. Building an emergency fund and paying off credit card debt, for example, may be at the top of an investor's priority list if they want to offer a secure financial platform for their family. Those who have already achieved their objectives may wish to begin saving for retirement instead.
People Never Know When They Need Their Money
It's crucial to determine when an investor may need the money before deciding how to invest it. If they just need the money for a limited period of time, it may be a good idea for them to keep it in more conservative investments. This may assist in limiting potential losses. They may be able to accept more risks if they invest over a long period since they have more time for recovery from market downturns.
An investor's risk tolerance may have an impact on the investments they make. Investors who can ride out major market swings might invest more aggressively in the long run, perhaps earning higher returns. Investing more aggressively, on the other hand, could result in larger losses.
Investors who don't like seeing their investment portfolio balances drop may opt for a more conservative approach. Investing in line with their risk tolerance can help them in maintaining a portfolio that works for their situations.
Fees, Minimum Investments, Etc.
Each sort of investment has its own set of fees, minimum investment requirements, and other characteristics that an investor should think about before making a decision. Greater costs are generally associated with more advanced investment types handled by Pittsburgh financial advisors compared to investing with a robo-advisor.
In-person financial advisors frequently impose high minimum investment requirements, as well as a 1% yearly asset management fee. If they have any, most robo-advisors have minor minimum startup investment requirements. In addition to that, their management fees are often lower.
What Is the Best Sort of Investment?
An investor must consider the following crucial factors before deciding how to invest their money:
What is their investment objective? Depending on whether they need to make a specific purchase, such as a down payment on a home, or whether they intend to use the money as retirement income, they may choose to invest differently.
Timeline for their investment: When do they need the funds? The types of investments that they choose are affected by whether they have a precise date in mind or are thinking about the future.
Investor's willingness to take risks: How may they react if the value of their portfolio decreases? Investing is always risky, but investors can select between risky investments with higher return profiles or safer investments with low return profiles.
How to Invest Money
Previously, one had to contact a wealth manager or an investment broker to invest their money.
An online broker can often develop a picture of a person's investing style by inquiring about their goals and risk tolerance when they open a new brokerage account.
Full-service brokers can manage almost any financial situation. They're licensed to give investment advice and can even assist investors in developing a comprehensive retirement strategy. They provide a service that is tailored to their client's needs, but they demand a lot of money and only take on clients with a high net worth.
Discount brokers can teach customers how to manage their own investments and give them the tools to do so. This can be done either directly or through a robo adviser, who can use an algorithm to make financial decisions on their behalf. Because the service is less personalized, the minimum deposit and costs are usually lower.
Why It's Important to Diversify Investments
Diversifying one's investments is essential, especially when dealing with such a large sum of money. In order to summarize, diversification entails examining an investor's entire portfolio to ensure that it is not only well-balanced but also meets their investing goals and objectives.
People make take the following scenario as an example to demonstrate. An investor putting all of their money into one stock, one investment area, or one asset class is the polar opposite of diversification. Thus, if someone had $20,000 to invest, they can be under-diversified if they place all of it into cryptocurrency, Apple stock, tech stocks, or bonds.
When a person is investing $20k, they should think broadly. If they’re putting all of it into stocks, then they should make sure they have a broad mix of stocks in the portfolio. With individual stocks, it's not recommended more than a 10% stake in any one single stock, but investors can adjust this to their individual needs.
However, it's encouraged to think beyond just stocks. With $20,000, an investor has the ability to invest in multiple asset types. Such as high-yield savings, stocks, art, and crypto.
This is critical since investors may not want to put all their eggs in one basket. If one of their stocks, sectors, asset classes, or other investments goes down in value, they can be less likely to lose everything if they're well-diversified. Diversification helps to keep things under control.
Thus, when it comes time to invest $20,000, people must make sure they spread it out over a range of options.
Depending on an investor's present life and financial condition, the best way to invest $20K is likely to differ. Setting a solid foundation before engaging in more unusual financial possibilities can be a good idea. Paying down credit card debt may be the best option for one person, while diversifying their portfolio with peer-to-peer loans may be the best option for another.
Whatever an investor chooses, they must not be intimidated by their choices. The trick is to make their $20,000 work for them. If they can't decide, they should consider dividing their funds among multiple options.