Let's go over how to invest $20k! If you have $20K sitting around, whether in your savings account or you just came into money, it’s time to do something with that money. Just letting it sit does nothing for your goals and has an incredible opportunity cost.
It doesn’t have to be in the stock market, although that’s not a bad idea either. There are plenty of ways anyone can invest $20K and make the most of their money. In this article, we cover all the tips you need to learn how to invest 20k. That way, you can have a solid plan in place for your money.
11 Tips for how to invest 20k
Here are 11 key tips on investing $20k.
1. Max your retirement accounts
If you haven’t started a retirement account yet, your 20,000 dollars is a great start. Before you invest, use these steps to make sure you maximize your benefits:
Maximize your 401K employer match
If you don’t already contribute to your 401K, find out how much your employer matches. For example, if they match 3% of your salary and you make $75,000 a year, they’ll match up to $2,250 per year. At least invest $2,250 in your 401K to get the "free" $2,250 from your employer. This simple step doubles your retirement account!
Max out other retirement accounts
After contributing at least as much as your employer matches, you can max out other retirement accounts, including your IRA, which you can contribute up to $6,000 in 2022 if you’re under age 50, and $7,000 if you’re over 50.
2. Create a well-rounded brokerage account
Diversifying your portfolio helps avoid significant losses. For example, if you invest in only stocks and the stock market tanks, you could lose everything. If you diversify your portfolio, investing in stocks, bonds, ETFs, mutual funds, and commodities, though, you offset the risk of a total loss.
Increasing your investment portfolio to include a good variety of investments will help you not only avoid a total loss but help with tax-loss harvesting. When you sell assets with a capital gain, it can incur a large tax liability, but selling an investment at a slight loss can offset the capital gains.
3. Utilize a robo-advisor or broker
If you haven’t started an investment portfolio yet, consider opening an account with a robo-advisor. A robo-advisor is an online broker - the computer acts as your advisor, managing your portfolio based on its algorithms.
The only job you have when you use a robo-advisor is to fund the account and answer a few questions about your risk tolerance. After you set it up, the robo-advisor does the rest. It takes the stress off you when choosing investments and managing your portfolio.
4. Invest in alternative investments
Consider alternative investments, such as fine art, antiques, or precious metals, if you’ve already invested more than you want in stocks and bonds. Alternative investments usually aren’t tied to the traditional market, so they won’t react the same as the stock or bond market, diversifying your portfolio.
Investments like art are subjective investments, so be careful. Since they’re subjective, their value could increase and decrease fast and unexpectedly.
5. Dabble in peer-to-peer lending
Peer-to-peer lending helps consumers get the funding they need when a bank doesn’t lend to them. It’s how many people get personal loans without dealing with mountains of paperwork and loads of restrictions from banks.
Peer-to-peer platforms match investors with borrowers. Platforms like Prosper ‘score’ borrowers and list the loan as available. As an investor, if you like the ‘score,’ you can invest part of the loan or all of it. Most people break up their investments across many loans, investing even as little as $25 in each loan.
You earn monthly cash flow when borrowers pay their loans. You earn a prorated amount of interest based on how much you invested. Peer-to-peer loans have a higher risk of default, but they also earn higher return rates than the stock or bond market.
6. Start a business
Starting a business from scratch can be fun AND risky. Don’t invest the whole 20,000 dollars, but using some of it to start a business can be one of the best decisions you make.
Before you start a business, do your research. Use the Small Business Administration as a resource, especially if you need funding. But also do other legwork, researching your market, deciding what ‘void’ you’ll fill with your product or service, and checking out your competitors.
Think about how you’ll run your business - will it be an eCommerce business or a brick-and-mortar store? Will you have employees, or is it just you running it?
You’ll need a business plan which should outline your short and long-term plans for your business, and you’ll need to figure out your business structure. Will you incorporate, be an LLC, or operate as an independent contractor?
7. Buy real estate
You can invest in real estate in a couple of ways. If you have the time and resources, you can be a landlord, investing in a long-term rental. As a landlord, you own the home and rent it out to tenants. You’re responsible for the mortgage, taxes, insurance, and home maintenance.
The rent your tenants pay should cover the mortgage payment and all other costs owning a home incurs, leaving you with a net profit. The monthly cash flow is a great way to grow your $20,000, making it work even harder for you.
If you’d rather not be a landlord, you can invest in fix and flip properties. You’ll need professionals by your side to help you find a perfectly undervalued property that, with the right upgrades or renovations, you could sell for a much higher price and make a profit.
8. Pay off debt
Paying off debt doesn’t sound like much of an investment, but it’s one of the best investments you can make when learning how to invest $20K.
If you have credit card debt, look at one credit card bill. See that interest rate? You won’t be able to meet that rate of return on any investment in the world. If you’re paying 19.99% or more, pay the debt off, and you’ll free up the money to invest once you’re debt-free. Investing while you have credit card debt is like stealing from yourself - get out of debt first and then invest.
9. Bulk up your emergency fund
According to a CNBC and Acorns Invest survey, more than 14% of Americans wiped out their savings during the COVID-19 pandemic. If that sounds like you or you didn’t have an emergency fund to start with, it’s time.
An emergency fund is separate savings you keep for emergencies - true emergencies. Job loss, a hospitalization, a major car accident, or a major home tragedy is an emergency.
Your emergency fund should have 3 - 6 months of expenses in it, but if 2020 taught us anything, it’s to err on the side of caution. Use the $20K to invest in yourself, protecting your future self should something happen.
10. Save for a goal in a high-yield savings account
As you think about how to invest $20K, don’t overlook the benefit of a high-yield savings account.
A high-yield savings account typically pays more interest than a standard savings account because it’s with an online bank that doesn’t have overhead. While you won’t get rich on high-yield accounts’ interest, the 0.50% - 0.75% is much higher than a standard bank pays.
When you invest in a high-yield savings account, name your goal for it. For example, are you saving for a trip, a car, or a house? When you identify what you want to save for, it’s easier to contribute to the account and not feel like it’s a sacrifice.
11. Invest in yourself
Sometimes the best investment you can make is in yourself. Investing 20,000 dollars in yourself may seem selfish to some, but when the outcome helps you do something even better with your life, it’s one of the best investments you can make.
A few ways to invest in yourself include:
- Go to back school
- Start a side hustle
- Improve your health
- Take courses and seminars
- Learn a new language
- Start a new career
The bottom line
The best thing you can do with 20,000 dollars is to diversify your investments. In other words, take a few of the ideas above and spread your money out. You’ll see as you learn how to invest $20K that it’s best not to put all your eggs in one basket. Spread your money out and see how well your portfolio grows!