How to invest $20K

You’ve done it—you’ve accumulated $20,000. Whether through diligent saving, a fortuitous inheritance, a lucky lottery win, or some other means, you’re now faced with a pleasing but daunting question: how best to invest this amount of money? With a myriad of investment options available, the choices can be overwhelming, especially for beginner investors navigating this kind of windfall for the first time. From stock portfolios to retirement accounts, the choices seem endless. Key factors such as your investment timeframe, risk tolerance, desired returns, and overall goals will heavily influence the best strategy for you.

In this article, we’ll take a step-by-step approach to explore various investment avenues including paying off debt, contributing to retirement accounts, working with brokerage and robo-advisors, and even investing in yourself—a critical and often overlooked strategy.

Start strong by paying off any debt

Best for: people with high-interest debt or who haven’t set up an emergency fund

Before sprinting down the investment track, it’s crucial to ensure you’re on solid footing. For many, this means addressing high-interest debt head-on. The rationale is simple yet compelling – the returns from paying off a debt with a 30% interest rate dwarf those from typical investments. 

Aim to eradicate these financial burdens as swiftly as possible. Simultaneously, consider establishing an emergency fund if you haven’t already, laying a safety net for unforeseen financial storms.

If you have no interest debt and already have a comfortable emergency fund that could float you for three to six months, congratulations, this is a huge accomplishment. Consider some of the investment options below.

Contribute to a 401(k) 

Best for: Those saving for retirement 

A 401(k) is a retirement savings plan sponsored by an employer, designed to help employees save for their future retirement. In 2024, the current yearly contribution limit is $23,000 a year or $30,500 if you’re 50 or older. The contributions are usually made pre-tax from your paycheck, and some employers may also offer a match on your contributions.

Investing in a 401(k), especially if your employer offers matching contributions, is akin to receiving ‘free’ money (though this is really part of your benefits package from the company, so take advantage of your benefits). Maximizing their match should be your starting point, as it offers an instant return on your investment.  Additionally, contributions to a traditional 401(k) reduce your taxable income and grow tax-free until withdrawn in retirement. 

Consider maxing out your Roth IRA

Best for: Those saving for retirement

Another retirement account option is an individual retirement account like a Roth IRA. The Roth IRA differs from a traditional 401(k) in that contributions are after-tax—money from your paycheck after income taxes have been deducted. If your employer doesn’t offer a 401(k) plan or if you’re self-employed, consider opening up and contributing to a Roth IRA.

Roth IRAs provide a unique opportunity for tax-free growth and withdrawals in retirement, making them incredibly appealing for long-term investment strategies. The current yearly contribution limit for 2024 is $7,000 a year or $8,000 if you’re 50 or older. With your $20k, fully contributing to a Roth IRA, and exploring other investment avenues with the remainder, could be a wise choice.

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Investing with a brokerage account

Best for: Those who want to manage their investment portfolio

A brokerage account is a type of investment account that allows you to buy and sell a variety of investment options such as stocks, bonds, ETFs, mutual funds, and more. Unlike retirement accounts which have restrictions on how much you can contribute yearly and when you can access your money, brokerage accounts offer greater flexibility and control over your investments. It’s important to note that investments in a brokerage account are subject to capital gains taxes, whereas retirement accounts offer tax deferral or tax-free growth.

With a brokerage account, you have the ability to create a diversified portfolio suited to your risk tolerance and investment goals. You can invest in individual stocks, which are shares of ownership in a company, or bonds, which are loans to companies or governments. ETFs (exchange-traded funds) and mutual funds allow you to invest in a basket of securities, providing diversification with one investment.

• Stocks: Stocks are shares of ownership in a company, providing potential for growth and dividends.

• Bonds: Bonds are loans to companies or governments, offering fixed interest payments and return of principal at maturity.

• Exchange traded funds: ETFs (exchange-traded funds) allow you to invest in a basket of securities, providing diversification with one investment.

• Mutual funds: A mutual fund is a pooled investment containing many stocks and other assets within a single fund.

• Commodities: Commodities are physical materials such as gold, silver, oil, or agricultural products that can be invested in through futures contracts or ETFs.

• Real Estate Investment Trusts (REITs): REITs are investment vehicles that allow you to invest in real estate without owning the physical property.

• Cryptocurrencies: Cryptocurrencies are digital or virtual currencies that use blockchain technology and have gained popularity as a form of investment.

Before investing, it’s crucial to research and understand the different types of securities available and their associated risks. Creating a diversified portfolio can help minimize investment risk and potentially provide more consistent returns over time.  A self-managed investment portfolio may not be suitable for those looking for a more passive investment approach.  

Let a robo-advisor invest for you

Best for: New investors wanting support or hands-off investors

For those daunted by the prospect of investing $20k without clear guidance, a robo-advisor offers a compelling solution. By automating investment decisions based on your risk tolerance and goals, robo-advisors simplify the investing process, making it accessible for beginner investors. 

With a robo-advisor, your money will be invested in a diversified portfolio of ETFs or mutual funds, customized to your individual risk tolerance and investment goals. This can be beneficial for beginners who may not have a lot of experience in investing, as well as those who are intimidated by managing such a large amount of money on their own. Additionally, robo-advisors can save time and effort for busy individuals who do not have the resources or expertise to actively manage their investments. 

However, it’s important to carefully research and compare different robo-advisors, as they may differ in fees, investment options, and level of customization. It is also recommended to periodically review your portfolio and make adjustments if needed to ensure that your investments align with your evolving financial goals.

Invest in your future-self

Best for: every single one of you

While all of the options mentioned above should be considered investments in yourself, investing in yourself through education and personal development has numerous benefits. Taking a career development course or attending a conference can expand your knowledge and skills, potentially making you more valuable to employers or clients. Working with a career or business coach can help you identify goals and create actionable plans to achieve them. Education, whether it’s obtaining a new degree or learning a new skill, can open up opportunities for career advancement and potentially higher income.

By pursuing new ways to grow and develop now, you are essentially investing in your future self, setting yourself up for long-term success and fulfillment. Any of the $20,000 can be used to cover the costs of these investments and has the potential to ultimately lead to a higher return on investment in the long run.  So don’t overlook the importance of investing in your own growth and development, as it can be just as valuable as traditional forms of investment.  Remember, you are your greatest asset and the best investment you can make is in yourself. 

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