March 23, 2020

Best Ways to Invest $20,000

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What to do with 20k in savings? Learn how to invest $20,000, plus 3 investments you must avoid. Imagine what it could be worth in 20 years if you start now.

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You did it! Building a nest egg of $20,000 wasn't easy. Now it's time to think about longer-term goals. 

  • Buy a house?
  • Start a business?
  • Level up in your career?

At the end of the day, we want to be financially stress-free. Maybe sitting on a beach sipping fresh coconut juice. But if you want to feel the sand between your toes in the future, you need to start now.

And you need to be careful. There are some investment pitfalls to look out for. 

Here are smart ideas to make the most of your $20k:

  1. Invest in Stocks
  2. Invest in Mutual Funds or ETFs
  3. Invest in Bonds
  4. Try a Robo-Advisor
  5. Try Peer-to-Peer Lending
  6. Consider Real Estate Investing
  7. Start Your Own Business
  8. Consider a Certificate of Deposit
  9. Fill a High-Yield Savings Account
  10. Invest in Your Home
  11. Invest in Yourself
  12. Try Fulfillment by Amazon
  13. Start a Blog
  14. Start a Podcast

Note: Because everyone is in a different financial spot, there is no single "best" way to invest $20,000. We'll be asking you some questions later to narrow down good investment options.

What to Do Before You Invest

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Before deciding how to invest your money, give your financial situation an honest review to make sure you're on solid footing first.

Ask yourself the following:

  • Do you have a lot of personal debt?
  • Do you have a 401(k)?
  • Do you have an IRA?

Pay Down High-Interest Debts

If you have a lot of personal debt, paying that down first is your best choice.

Paying debts down can be just as profitable as investing—and healthier for your finances in the long run.

For example, say you're expecting a 5% rate of return on your investment portfolio, but you currently have $5,000 in credit card debt with a 23% APR. If you decide to invest instead of putting those funds toward credit card debt, you would be losing money.

Rate of return is the profit off an investment. Banks write it as a percentage. If you make $50 on a $1,000 investment, your rate of return is 5%.

Keep in mind that some lower-interest debt, such as an auto loan or home mortgage, is considered OK to hold while making investments. That's because the debt has a fixed timeline and you may be able to match or meet the rate of return through investing.

Secure Your Retirement

If you've gotten your debt under control, ask yourself whether you're on track to meet your retirement goals:

  • Do you have a 401(k)?
  • Does your employer match contributions?

First, be sure to enroll in any 401(k) plan that is available to you. Then, check with your company HR department to see what percentage your company matches. Contribute at least that amount—otherwise, you're turning down free money.

401(k) Company Match: Some employer's vest their contribution to your 401(k). This means you'll likely have to work at the company for a certain amount of time to receive some, or all, of their match. But you'll always get 100% of your contribution, regardless of how long you stay with the company.

Even if your company doesn't match, consider contributing the maximum amount before you invest $20,000 in other ways. That will give your retirement savings a boost and lower your taxable income.

You may also want to consider opening a traditional IRA or Roth IRA to supplement your long-term savings. These retirement accounts also have tax advantages. As of 2020, you can contribute up to $5,500 per year, or $6,500 if you are over 50.

With a traditional IRA, you can deduct the amount you contribute from your annual taxable income. For a Roth IRA, you cannot deduct that amount, but you'll be able to withdraw the funds for retirement tax-free.

If you're self-employed, your retirement savings options can include starting a 401(k) or a SEP (Simplified Employee Pension) IRA. Check with a tax professional to review your options.

How to Invest $20,000

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Once your debt is under control and your retirement plan is on track, you can explore different options for investing $20,000.

  1. Invest in Stocks
    If you do invest in stocks, create a plan first. Set the amount you want to invest and understand your personal capacity for potential losses.

    When you're ready to begin, consider using an online brokerage account, such as Ally Invest, or one of many others. If you're completely new to investing, choose a company that offers a simple interface and educational resources. Read How to Invest in Stocks for Beginners to learn more.

    Once you choose an online broker, create your account.

    Review stock performance histories and professional forecasts, then choose one or two stocks that match your risk tolerance to start your investment. Hold off on investing a lot until you have a good handle on the process.

    Understanding Risk: It's important to know the possible risks before choosing your investments. These can include market risks, business risks, political risks, and liquidity risks, among others. The general rule of thumb is the higher the risk, the higher the reward.

    If you take a loss, weigh the risks again to decide whether to pull or keep your investment.

  2. Invest in Mutual Funds or ETFs
    Mutual funds and ETFs offer diversification. Rather than investing in one company as with stocks, a mutual fund or ETF diversifies among stocks, bonds, and other short-term investments.

    First, choose a brokerage. Charles Schwab, Vanguard, and Fidelity are some of the most popular. You can also research brokerages that currently offer promotions to maximize your earnings.

    Longer-term goals, such as retirement, do well with index funds. These funds mimic a specific index, such as the S&P 500. They offer diversification and a long-term investment strategy. The returns on index funds closely mimic market returns. They require very little management and often have lower fees.

    Choose the fund with the lowest expense ratio, as minimizing costs is the key to maximizing net returns.

  3. Invest in Bonds
    Buying a bond is basically just buying debt. You can invest in them much like you would stocks (read our guide for more information about the differences between stocks and bonds).

    In general, bonds tend to be more predictable than stocks. There are three main types:

    • Corporate, which are offered by corporations looking to raise capital
    • Municipal, which are issues by towns, cities, and states to fund public projects
    • Treasury, or T-bonds, which can be purchased directly from the U.S. government

    With bonds, you can also calculate your return before you purchase a bond based on rate and period of maturity.

    As with any investment, bonds do carry some risk. For example, when interest rates rise, bond prices fall. This means that if you choose to sell a bond before its maturity date, you could make less than the price you paid for it.

    Bonds generally must be purchased through a broker, while T-bonds can be bought directly from the government.

  4. Try a Robo-Advisor
    If $20,000 isn't enough for a financial advisor to take you on as a client, consider a robo-advisor, such as Betterment. A robo-advisor is an automated advisor program that does much, or all, of the work for you.

    Once your investments are in place, a robo-advisor can also automatically rebalance your portfolio (see our guide on Why Consider a Robo-Advisor for more information).

  5. Try Peer-to-Peer Lending
    Peer-to-peer lending (P2P) is a newer method of investing and an especially good choice for those who don't want to deal with a financial institution. Instead, you become the lender. By joining a P2P platform, you can connect with borrowers all over the world.

    Lending Club and Prosper are the top two P2P platforms. They work as the intermediary between you and the borrower.

    They distribute the loans to borrowers (funded by you), collect payments, and help with litigation if the borrower defaults. You can even diversify your risk by lending money to multiple borrowers at once. Your $20,000 could fund many borrowers with low borrowing needs.

    While P2P can offer a high rate of return, there is always a risk of your borrower defaulting on their loan.

  6. Consider Real Estate Investing
    A good way to start earning passive income on your $20,000 investment is with real estate investing. Many invest in real estate through investment vehicles like real estate investment trusts (REITs).

    You can invest in a share of a REIT just like you would invest in a stock. REITs provide profits through rental income they collect from properties or property appreciations, among other ways.

    Fundrise and RealtyMogul are two popular online real estate investing platforms that offer a variety of investment opportunities. Do some research about what kind of real estate investment would work best for you (commercial, residential, REITS, and more) before deciding where to put your money.

  7. Start Your Own Business
    If you are tired of the 9-to-5 grind, investing $20,000 in your own business could be your chance to break free. But you'll need a great idea—and a solid business plan—before seriously considering starting your own business.

    Before starting a business, it's always a good idea to consult professionals and take advantage of any available resources. We recommend visiting the Small Business Administration's website for advice on how to get started. They offer many resources and steps for beginner and experienced business owners.

  8. Consider a Certificate of Deposit
    If you are looking for a risk-free investment with decent returns, consider investing your $20,000 in CDs. We recommend using an online bank rather than a traditional bank like Chase because they tend to offer higher rates.

    With CDs, the longer you invest the money, the higher the APY (annual percentage yield) you'll earn. Keep in mind that CDs with higher APYs also come with higher account minimums.

    Before choosing a CD, consider the minimum deposit required, the yield rate, and the term length. Remember, you cannot withdraw your money from a CD before the term is up. If you're absolutely sure you won't need your money for a specific amount of time, choose a CD term for that length of time.

  9. Fill a High-Yield Savings Account
    When we talk about savings accounts, we don't mean the account at your local bank where you already have a checking account. We mean online savings accounts where you could obtain rates as much as 10 times higher than your local bank. One such account with a high APY is CIT Bank's Savings Builder (read our review). Take a look at our CIT promo code page to learn more.

    You should consider a few things before you invest. Make sure the FDIC insures the bank. Also, read the fine print regarding withdrawals and transfers, as some banks charge or even penalize for them.

    Check for required account minimums too. If you prefer a debit card, look for banks that offer this service.

  10. Invest in Your Home
    Your home may be your largest investment. If it's outdated or needs a facelift, certain improvements can have a direct impact on your home's value.

    You don't need to make drastic changes to see a large improvement in value (in fact, some major bathroom and kitchen remodels often don't have a large return on investment). New siding, a new roof, or new windows are more worth your time and money.

    However, certain small changes in a kitchen or bathroom, such as the addition of granite countertops, often pay off. Another change with a large return on investment (ROI) is updating the home's curb appeal. You may even get a tax break for improvements made in energy efficiency.

  11. Invest $20,000 in Yourself
    You can also use your savings to take an educational course that can improve your career and your earning prospects. With this strategy, you could easily turn $20,000 into much larger earnings.

    Here are some ways you can invest $20,000 in yourself:
    • Take a class or a workshop: Seminars, higher-education courses and mentorship programs can help build your network to move up in your job.
    • Hire a business or career coach: Identify long term goals to start your own business or side hustle.
    • Invest in your health: The right food and consistent exercise allow you to grow professionally and personally.
    • Learn a new skill: Keep your mind sharp and nimble.
    • And here are some freebies: Read, watch, and volunteer.

  12. Try Fulfillment by Amazon
    With $20,000, you can get going with a retail business through Fulfillment by Amazon. Essentially, you ship the items you want to sell to Amazon, which then fulfills any orders your get and ships your products for you. Rates vary by the sizes of the packages shipped and the amount of warehouse space you'll need, but $20,000 should be plenty to get a small operation going.

    You'll have access to Amazon's large marketplace of buyers, and you only do a fraction of the work involved with other selling sites. It almost provides immediate gratification. You can sell new or used items.

  13. Start a Blog
    If you're a DIY kind of person, consider starting a blog. Many people use blogs as a side gig and eventually earn money as an affiliate partner with different businesses. Blogs have the potential to make you a steady stream of income through advertising, and $20,000 is more than enough to start one.

    You'll likely need some of that money to buy a domain name and web hosting service. Or, you may need to invest in equipment like video recorders, microphones, cameras, or a better computer.

  14. Start a Podcast
    The podcast world is increasingly difficult to break into, but there is still room to make money. You should be prepared to dedicate a lot of time and energy to producing regular content. But, if it's something you enjoy doing, you may find the advertising deals you can get by podcasting to be lucrative.

The 3 Investments You Should Avoid

Some types of "investments" aren't really investments at all. In fact, you could easily lose your $20,000 if you put it into a risky scheme.

Here are some examples of what to avoid when looking to invest $20,000:

  1. Pyramid Schemes. You may have heard of businesses that promise to make you rich if you can recruit others to join them. If you're asked to pay to join a business with that type of model, be aware that it may be a pyramid scheme. These schemes will rarely make you as much money as they promise to.

  2. Penny Stocks. Stocks that you can buy for less than $5 may seem like a great deal. After all, with $20,000, you could buy a lot of these shares. But usually, they're not profitable at all.

    Companies that offer penny stocks are often very small and are required to disclose their financials. They may be trying to raise capital to grow, but they're not always successful in the long run.

  3. Gambling. Yes, you could possibly win big with gambling $20,000, but people rarely do. Statistically, you are much more likely to lose your money when you gamble. That's true whether you are playing in a casino or buying a lottery ticket. The odds are not in your favor, so while gambling may be entertaining, it's a poor investment choice.

Bottom Line

Fortunately, you have many options for how to invest $20,000, from investing in the stock market to launching your own business. Weigh the pros and cons of each option to find the best strategy for you.

Remember, before you invest, give your finances a health checkup to make sure you are in the best position to start investing. And beware of risky investments like penny stocks and pyramid schemes, which may not be what they seem.

The bottom line is that the sooner you can start investing your funds in a safe way, the more you can benefit from the rewards of your investment.

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

TD Ameritrade has not influenced the content of CreditDonkey. CreditDonkey may earn compensation for accounts opened at TD Ameritrade.

More from CreditDonkey:


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