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You're here because you have $20,000 and you want to know how to invest it effectively. You want to discover the best methods to make this money work for you. Well this task can be exciting but also a bit daunting.
Think about the $20,000 as an opportunity. It could have come from various sources – maybe an inheritance, a property sale, a work bonus, or another form of income.
Why is it important to invest this $20,000 now? Well, if it just sits in your checking account, it's not growing. In fact, each year, its value is slightly reduced due to something called inflation.
Also click here if you'd like to know how to invest $20k in Australia.
Don't worry about your age either, whether you're just starting out in your 20s or you're in your 50s, there's a suitable investment option for you.
Now, let's explore the best ways to invest $20k for maximum profit.
Table of Contents
1. Invest in Stocks Through a Discount Broker
I believe that the best way to invest $20k is to invest in the stock market. The more you have invested, the more you make.
It cannot be understated how important investing is to building wealth and achieving financial success.
Investing in the stock market through a discount broker is a popular way to invest in the stock market.
You can buy stocks, bonds, ETFs, options, and futures through a stock exchange.
Investing with a discount broker is a great way to invest money if you don't require investment advice.
It's cheaper to trade through a discount broker than a full-service broker, but they still charge fees. These fees typically range from 0.12% to 2% per trade depending on the broker.
Discount brokers are best suited to people who don't need investment advice, trade regularly, or have small portfolios.
2. Invest $20k with a Robo-Advisor
Investing $20k with a Robo-advisor is a great way to gain exposure to the stock market as a newbie investor.
A Robo-advisor is basically your personal portfolio manager—except it's a software-based algorithm.
The Robo-advisor will automatically pick your investments, diversify your funds, and adjust your portfolio over time. These changes are all based on your chosen long-term investment goals.
Your investment goals will be determined after you complete an initial survey. This is designed to assess your financial goals, risk tolerance, and investment timeline.
One of my favourite robo-advisers is Raiz. It's super easy to set up and gives you multiple investment options to choose from.
3. Investing $20k in a Mutual Fund
Choosing to park your hard-earned cash in a mutual fund can be a smart, stress-free strategy to let your money work for you.
In essence, mutual funds are a pot of money gathered from various investors and invested in diverse securities such as stocks, bonds, and other assets. This approach diversifies your investment, reducing risk and opening up opportunities for returns from different avenues.
The key players behind mutual funds are expert money managers, usually possessing a strong academic foundation in finance and economics. Their primary role, supported by a team of adept analysts, is to allocate the fund's assets optimally. The goal? Capital gains and income generation for the mutual fund investors.
Let's talk Mutual Fund Fees
Morningstar, a trusted name in investment research, reveals that the average expense ratio of a large-cap fund with assets exceeding $5 million stands at 1.45%. So, if you put your $20,000 in such an average large-cap fund, your annual fees would amount to $290. This might seem like an expense, but consider it a small investment for your peace of mind, the peace of having your money managed by a seasoned professional.
Recommended Mutual Funds
Large Growth mutual funds generally offer the best long-term returns. Financial guru Dave Ramsey suggests investing 15% of your after-tax income in mutual funds as a surefire strategy to accumulate wealth.
Here's a look at three of the largest mutual fund companies in the US for your consideration:
- BlackRock Funds (iShares)
- Vanguard
- Charles Schwab
Exchange-Traded Funds (ETFs)
Alternatively, you could consider investing through an Exchange-Traded Fund (ETF). Like mutual funds, ETFs give you the opportunity to buy a set of stocks in one go, making investment simpler and diversified.
Of all the options available, I'd endorse the iShares Core S&P 500 ETF as a top contender. This fund buys stocks from all companies listed in the S&P 500 index, and boasts a meager annual fee of just 0.03%.
Investing in this particular fund presents an effortless route to potentially growing your money, irrespective of your expertise in investing. This way, your money is not just sitting idle, but is actively generating more wealth for you.
4. Invest in Stocks Through a Full-Service Broker
Another way to invest in stocks is through a full-service stockbroker.
Full-service stockbrokers are a bit different from discount brokers and they do more than facilitate the buying and selling of securities.
Full-service brokers are a better option for investors who need professional investment advice.
They are more expensive, however. Full-service brokers typically charge 1-2% of the total assets managed annually.
Buying stocks through a full-service broker is one of the best ways to invest $20k if you don't know much about investing.
Related articles:
- How to Invest $1000
- Best Investing Books
5. Step into the World of Real Estate with a Real Estate Investment Trust (REIT)
For those who've been contemplating how to wisely invest $20,000 in real estate, look no further, REITs are just what you need!
Let's bust a common myth—investing in real estate doesn't always require a mountain of cash. In fact, a sum of $20,000 can make for an excellent start. The exciting part? You can earn a passive income from dividends whilst simultaneously dipping your toes into the vibrant property market.
REITs are investment vehicles which you can buy into through a mutual fund or an Exchange-Traded Fund (ETF).
Just like any other public company, REIT shares are subject to market pricing throughout the trading day.
What Powers REIT Growth?
The primary driver of REIT growth is an uptick in earnings. If revenues increase, costs decrease, or new assets are purchased, you can expect a rise in the earnings of your REIT.
Factors specific to the real estate sector, such as building occupancy rates, incremental increases in rent over time, and property acquisitions, can directly impact the revenue of REITs and therefore your potential return.
6. Max Out Your Retirement Accounts with a $20k Investment
Taking your $20k and maximizing your retirement accounts can be a rewarding strategy, especially if you are comfortable with the idea of locking your money away until retirement.
There are options like your 401(k) and Roth IRA that can help you prepare for a comfortable retirement.Just like investing through a broker or Robo-advisor, retirement accounts can offer substantial growth over time. However, they come with the advantage of potential tax benefits, making them an attractive option for many.
If you're more interested in having easy access to your funds, you may want to consider investing through a broker or Robo-advisor instead. They offer more flexibility, allowing you to access your funds whenever you need them, without penalty.
7. Park Your $20k in a High-Yield Savings Account
While there are more lucrative ways to invest $20k, a high-yield savings account does present a secure, risk-averse alternative. These accounts are perfect if you want your money to be readily available in case of a financial emergency.
High-yield savings accounts, unlike traditional savings accounts offered by larger banks, offer a higher interest rate. With these accounts, your money is not only secure, but it also grows at a relatively faster rate.
They also offer the same level of security as standard savings accounts, as they are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Share Insurance Fund. Your deposits will be protected for up to $250,000 per account.
Consider opening an account with ING Bank, an online bank renowned for its high-interest rates. This is possible because, unlike traditional banks, ING saves significantly on operating costs as it doesn't have physical branches. These savings, in the form of reduced overhead and staffing costs, are passed onto customers as higher interest rates and lower fees.
I should mention that I'm not affiliated with ING Bank, but I wish I was. Alsoremember that online banks may not offer the same personal interaction as traditional banks, which might be important for complex banking matters.
8. Embrace Peer-to-Peer Lending with Your $20k Investment
Investing your $20k in a peer-to-peer lending platform is another viable strategy to consider. Peer-to-peer (P2P) lending is a relatively modern method of investment that allows you to lend money to individuals or businesses in return for interest.
Platforms that facilitate P2P lending match lenders with borrowers, providing an annual return rate typically ranging from 3-7%. P2P lending was first introduced in the US in 2005, and although it has the potential to yield decent returns, it also carries certain disadvantages, such as credit risk and lack of government protection.
9. Invest $20k in a 529 College Savings Plan
Allocating part of your $20k towards a 529 college savings plan can be a valuable investment for your child's future, especially given the escalating costs of college tuition.
A 529 plan not only permits your contributions to grow tax-deferred, but it also allows for tax-free withdrawals when the funds are used for qualified higher education expenses such as tuition, books, and certain room and board costs. Moreover, many states offer additional tax benefits, such as income tax deductions or credits for contributions made to a 529 plan.
Most states offer at least one type of 529 plan, providing you with numerous options to choose from. Furthermore, a key feature of the 529 plan is the flexibility it provides – should your first child decide not to pursue higher education, you can easily switch the beneficiary to another family member. This ensures that your investment continues to serve its intended purpose within the family, fostering the pursuit of higher education.
What Will Happen if I Invest $20k in Stocks?
Here is a graph showing what a $20,000 investment at age 25 would look like while growing at average stock market returns of 7% annually until age 65.
I made this graph with a great compound interest calculator created by ASIC.
As you can see, investing $20,000 in an S&P 500 index fund at age 25 would have grown to a whopping $299,489 by age 65!
You can become vastly wealthier if you continue to invest money in index funds throughout your career. You're not just earning interest on your original money, but you're earning interest on the interest. That's the magic of compound interest.
How to Invest $20k Summary
It's also important that you remember to diversify your investments. $20,000 is a decent amount of money to invest, and you wouldn't want to lose it!
If you're successful, your $20k investment could be worth significantly more in a few years (as shown in the graph above).
But perhaps you have even more money to invest, if so, you can visit my how to invest 50k article. This comprehensive guide may offer you some additional strategies and insights.
