Picture this – you’ve received or saved $20,000, and you’re not quite sure what to do with it. You could spend it on a luxurious vacation or a new car or perhaps invest it wisely to set yourself up for financial stability in the future. Well. let’s find out the best way to invest $20k!
This article discusses ideas for different investment strategies that suit varying financial goals, investment time horizons, and risk-tolerance levels.
Soon you will better understand the various investment options available to you. You’ll also discover their benefits, risks, and how to approach the decision-making process.
So, without further ado, let’s explore what to do with $20k!
Short-term strategies to invest $20k
Short-term investment strategies are designed for those who are looking to invest for a period of up to two years.
They are a great option if you want to save for a specific goal. For example, a down payment on a house, a wedding, or a vacation.
Short-term investment strategies are also great for building your emergency fund as long as they aren’t too risky.
Common examples of short-term investments include:
- High-yield saving accounts
- Money market funds
- Peer-to-peer lending
High-yield savings accounts
If you’re looking for a safe and straightforward way to invest $20k, a high-yield savings account may be the way to go.
A high-yield savings account is like a regular one. However, it has a higher interest rate, allowing you to earn more money over time.
But unlike other investment options, there is no risk of losing your money due to market fluctuations.
Moreover, high-yield savings accounts are FDIC-insured, meaning that the federal government protects your cash up to $250,000 for each depositor, per insured bank.
This is why high-yield savings accounts are a popular choice when it comes to short-term investment strategies.
They are a low-risk, low-stress way to earn interest on your money without tying it up for an extended period.
Money market funds
Regarding short-term investments, money market funds are an attractive option for those who want to earn a higher return on their money than they would with a traditional savings account.
A money market fund is a sort of mutual fund that invests in short-term and low-risk securities like government bonds, certificates of deposit, and commercial paper.
These funds aim to maintain a stable share price of $1 per share, making them a low-risk, low-volatility investment option.
Another advantage of money market funds is that you can usually access your funds quickly and easily. Which is in contrast to longer-term investment strategies.
So, if you’re looking for a low-risk, low-volatility investment that offers a stable return, a money market fund may be the way to go.
Peer-to-peer lending
When it comes to short-term investment strategies, peer-to-peer (P2P) lending is an innovative option. It offers a unique combination of high returns and low risk.
P2P lending connects borrowers directly to investors without the need for an intermediary financial institution. In other words, YOU become the “bank.”
By cutting out the middleman, P2P lending allows investors to earn higher returns than they would with traditional savings accounts or money market funds.
In addition, because loans are diversified across multiple borrowers, reducing the impact of any single borrower defaulting on their loan, P2P lending is typically considered a low-risk investment option.
As a bonus: you choose who you invest with—making it easier to put your money where your values are.
That said, it is very important to do your research when it comes to P2P lending platforms.
Mid-term investment strategies to invest $20k
Mid-term investment strategies are suitable for those who are looking for the best way to invest $20k for a period of two to five years.
It’s a good strategy for things like saving for a child’s education or starting a business.
Common examples of mid-term investments include:
- CDs
- Robo-advisors
- Mutual funds
- Exchange-traded funds
- REITs
CDs (Certificates of Deposit)
CDs, or Certificates of Deposits, offer a safe, low-risk investment option with a guaranteed return for your mid-term financial goals.
A CD is a deposit account that typically offers a set interest rate for a specific term, such as six months, one year, or two years.
Like with high-yield savings accounts, one of the primary advantages of CDs is that they are FDIC-insured.
CDs also offer higher interest rates than you’d find with traditional savings accounts. That makes them a good option for those looking to earn more money on their investment.
And in contrast to high-yield savings accounts, the bank guarantees interest earned, regardless of inflation volatility.
This makes it a very good option for those looking for a guaranteed investment return over a specific period.
Robo-advisors
With user-friendly platforms, diversified investment portfolios, and 24/7 access to your investments, robo-advisors provide a convenient and cost-effective way to grow a $20k investment.
A robo-advisor is a digital investing option that provides automated investment management services.
It uses complex algorithms to create and manage a personalized investment portfolio for you. And it’s based on your financial goals, risk tolerance, and investment timeline.
And because robo-advisors eliminate the need for a traditional financial advisor, who typically charges high fees for their services, you can access professional investment management services at a fraction of the cost.
As an added perk, robo-advisors are designed to make a well-balanced portfolio of investments across different asset classes. Which can help to mitigate risk and increase returns.
Index funds
With diverse investment options and high transparency, index funds are a reliable and proven way to invest $20k for mid-term purposes.
Index funds are an aggregation of stocks, bonds, and other securities. They both track an index depending on the index fund e.g. The S&P 500 index.
When investing in index funds, you can access a wide range of investment options, which can help spread your investment risk and maximize returns.
While not actively managed (e.g. like mutual funds), index funds are known to have significantly lower fees and offer strong investment returns over time.
Moreover, the prevalence of index funds is high, so whether you’re looking for a conservative, low-risk investment option or a more aggressive investment strategy, there’s likely a fund out there that meets your needs.
Exchange Traded Funds (ETFs)
With their low fees, flexibility, ease of access, transparency, and potential for long-term capital appreciation, ETFs can provide a reliable investment strategy that aligns with your financial goals.
ETFs are similar to mutual funds since they are a collection of securities that can provide diversification and risk management benefits.
However, ETFs trade on an exchange like a stock, allowing you to buy and sell them throughout the trading day at market prices.
Compared to actively managed mutual funds, which require professional management and research, ETFs are typically passively managed. So their management fees are much lower, allowing you to keep more of your returns.
And investing in a diversified portfolio of ETFs can minimize the risks associated with individual securities and market volatility, potentially achieving steady returns over the long term.
REITs (Real estate investment trusts)
If you want a way to invest $20k for mid-term purposes that provide regular income and capital appreciation, investing in real estate investment trusts (REITs) could be a great option.
REITs own, operate, or finance income-producing real estate, such as shopping centers, office buildings, apartments, and hotels.
By investing in REITs, you can gain exposure to the real estate market without the hassle of buying and managing physical properties.
And when you do so, you get to invest in various property types and geographic regions, allowing you to diversify your portfolio and minimize risk.
REITs are required by law to give at least 90% of their taxable income to their shareholders as dividends, providing investors with a reliable source of income.
Long-term strategies to invest $20k
Long-term investment strategies are the best way to invest $20k for five years or more. They are a great option if you’re looking to build long-term wealth, such as saving for retirement.
Common examples of long-term investments include:
- Retirement accounts
- Real estate
Traditional IRA
A traditional IRA allows individuals to contribute pre-tax dollars, which can lower their taxable income for that year.
The money grows tax-deferred until withdrawal in retirement when it is taxed at the individual’s tax rate.
Roth IRA
Roth IRAs allow individuals to contribute after-tax dollars, meaning there is no contribution tax deduction.
However, the investment earnings grow tax-free, and withdrawals in retirement are also tax-free.
401(k) retirement account
This is an employer-sponsored retirement account where employees can add a portion of their pre-tax income.
Some employers may match a portion of their contributions. The money grows tax-deferred until withdrawal in retirement, where it is taxed as ordinary income.
Other types of retirement accounts include Savings Incentive Match Plan for Employees (SIMPLE) IRA plans, Simplified Employee Pension (SEP) plans, and Solo 401(k)s, among others.
Investing in retirement accounts is a wise choice for long-term financial planning.
Retirement accounts offer tax benefits, the power of compounding interest, a range of investment options, and the opportunity to plan for your future.
In addition, by investing in retirement accounts early, individuals can build a comfortable nest egg that will last for decades, ensuring a financially secure retirement.
Real estate
Real estate offers the potential for appreciation in value, passive income, a range of investment strategies, a hedge against inflation, and greater control over your investment.
It’s a tangible asset that has the potential to appreciate over time. Investing in a property allows you to watch your investment grow as the property increases in value.
Treating your real estate as a rental property could earn a steady stream of ongoing passive income. Or else you can venture into flipping properties for a quick profit.
Another real estate investment strategy is to buy a home to hold it as an asset until the appreciation in value allows you to invest in a higher-value property.
Because as inflation drives up the cost of goods and services, it also drives up the value of real estate.
Other Ideas To Invest 20k? Think outside the box!
Hoping to get more creative with finding the best way to invest $20k? If so, paying off debt or investing in education may be your route.
Let’s explore these ideas a little further!
Pay off debt
When you carry debt, you’re essentially paying someone else for the privilege of borrowing their money. And unfortunately, that interest can really add up over time.
So by using $20,000 to pay off your debt, you can save yourself a significant amount of money in interest payments over the long run.
Paying off your debt can also improve your credit score, positively impacting your financial life.
With a higher credit score, you may qualify for lower interest rates on future loans, credit cards, and mortgages, saving you even more money in the long term.
And we’d be remiss if we didn’t note that paying off debt is the gift that keeps giving.
Why? Because when you pay off debt, you free up your cash, giving you more money to put towards other financial goals, such as investing, saving, or even treating yourself to something special.
Invest in your education
With $20,000, you can pursue additional education – whether a college degree, trade school, or other specialized training.
This can open up new doors and opportunities for your career and increase your earning potential over the long run.
So if you’re thinking about what to do with $20k, investing in your education today could mean limitless returns tomorrow.
Investing in education can also positively impact your personal growth and development. It can expand your horizons, challenge you to think differently and expose you to new ideas and perspectives.
This can help you become a more well-rounded and fulfilled individual, professionally and personally.
Things to remember when deciding what to do with $20k
Before jumping into the first strategy that catches your attention, I encourage you to reflect on your goals and personal circumstances.
This will help you find an investment strategy (or strategies) that align with your long-term objectives in life, minimize risk, and maximize returns.
To set the stage for picking an investment strategy, consider the following:
Set financial goals
What do you want to achieve with this money?
For example, are you looking to save for retirement, buy a home, pay off debt, or invest for the future?
Once you have a focused idea of your financial goals, you can explore the best investment options to help you achieve them.
Outline a time horizon
How long do you plan to hold onto your investment?
Is it a short-term goal, such as saving for a house, or a long-term goal, such as building a retirement nest egg? Your investment time horizon will influence the types of investments you choose.
Understand your risk tolerance
How much risk are you comfortable taking to earn higher returns?
Are you okay with the ups and downs of the stock market, or do you prefer more conservative investments with lower risk?
Understanding your risk tolerance can help you choose the right investment strategy for your needs.
Diversify your investments
You don’t want to put all your eggs in one basket when finding out the best way to invest $20k.
Instead, consider diversifying your investments across various asset classes, such as stocks, bonds, real estate, and commodities.
This can help reduce your overall risk and potentially increase your returns over the long run.
Don’t forget to do your research before investing your 20k
Once you determine a strategy that aligns with your answers to the above, you can research the options available within the specific investment strategy of your choosing.
Here are some key questions to consider when researching potential investments:
What at the tax implication?
Will you be subject to capital gains taxes or other taxes on your investment returns? Understanding the tax implications can help you make smarter decisions and maximize your after-tax returns.
How has the investment performed historically?
How has it performed over time, and how does it compare to similar investments? Historical performance can be a valuable indicator of future potential returns.
How is the investment managed?
Who manages the investment, and what is their track record? Do they have a clear investment strategy, and are they aligned with your financial goals?
Know what type of management your investment will have before deciding what to do.
What are the company’s corporate values and social impact?
Does the company behind the investment clearly commit to social responsibility and sustainability?
Do their values align with your own, and do they positively impact society and the environment?
Choosing investments that support your values will give you peace of mind and potentially make the world better.
Are there investment fees?
What are the fees associated with the investment, and how do they compare to similar investments? High fees can reduce your overall profitability.
What do market trends and indicators look like?
What is the current state of the market, and how does it impact the investment you’re considering?
Are there any potential risks or opportunities you should be aware of? Research this before you make a choice about how to invest.
The best way to invest $20k depends on you!
Investing $20,000 can be a smart way to set yourself up for financial stability in the future.
And by considering your financial goals, investment time horizon, and risk-tolerance level, you can choose the investment strategy that suits you best.
Whether you opt for stocks, bonds, real estate, or other investment vehicles, it’s essential to do your research, stay informed, and make thoughtful decisions that align with your values and goals.
So, use the knowledge and tools you have learned here to make informed decisions about the best way to invest $20k. Remember, starting early and staying committed to your goals is the key to building wealth.
