If you have or recently invested $20,000, congratulations! Saving (or inheriting) that kind of money in a short period of time is not easy and not accepted.
But if you misinvest that money, you are actually losing money due to inflation.
Here are nine ways you can invest that money, including recommended allocations and other tips.
1. Invest with a robot advisor
Investing your $20,000 with a robo advisor is a great option as you will be able to dive right into the widely diversified stock market.
A robot advisor is similar to a financial advisor, but instead of a human picking up expensive investments for you, a company like Improvement creates a series of algorithms to select, diversify and adjust your investments over time based on your financial resources, risk tolerance and investment objectives.
Read more: The best robo-advisers
You can choose a regular taxable investment account or set up an IRA. You can start by setting up and maximizing either Roth or a traditional IRA and then use the rest for a taxable investment account.
You can currently contribute up to $6,000 per year to an IRA if you are not older and do not qualify.
Connected: Roth IRA or Traditional IRA: Which Should You Choose?
2. Invest with a broker
While many people prefer to invest without the help of robo-advisers, many prefer to invest on their own. Brokers can help you with this. Before online brokers came on the scene, people paid huge commissions to a broker who transacted on their behalf. This is fast becoming a thing of the past.
For a small fee, online brokers can help you learn about the stock market and invest your money quickly and easily.
Read more: Best Online Brokerage Accounts for Beginners
3. Make a 401(k) exchange
If you’re employed and have $20,000 to invest, one option is to effectively “swap” the money for your 401(k).
Since this money usually comes from your salary or bonus, you can increase your contribution significantly (usually up to 75% of your salary) until you contribute $20,000 using the cash you have to make up for lost income.
Let’s say you’re making $40,000 a year and you’re putting 5% into your 401(k) right now. Not counting any overlap with an employer, that’s about $2,000 a year. Now let’s say you have $20,000 that you want to invest.
You can put that $20,000 into a liquid, high-yield savings account and then increase your 401(k) contribution so you don’t feel like you’re living on less. (Though I still encourage you to do so.)
So instead of a 5% contribution, change it to 50% – yes, 50%. In a year, not only will you have invested $20,000 in 401(k), but you will also have another huge benefit: you have just reduced your taxable income by 50%. When you make 401(k) contributions, you are not taxed on those contributions. You are only taxed on what is left in your paycheck.
This means that in the eyes of the government, you only made $20,000 in a year, not $40,000. In most cases, you will pay less taxes, so this is a win-win.
Read more: How much should your 401(k) have at age 30?
4. Invest in real estate
It will likely take over $20,000 to get started with single family rental properties, but that doesn’t mean you can’t get started in real estate if you want to. There are companies where you can pool your money with other investors and make big investments as a group.
Until recently, you had to be an accredited investor to invest in these types of projects (or have tons of money to invest). But now there is a crowdfunding real estate investment site, Fundrise, which creates loans for people or groups who buy commercial property.
Think big projects like apartment buildings and office buildings. They then pool these loans together and turn them into investments called eREITs. They then sell the eREIT shares to you as an investor directly through their website.
In other words, they make it incredibly easy to invest in large real estate projects.
Now, those of you who have read my thoughts on investing over the years know that I hate to correlate past results with future returns, but it’s worth noting that Fundraising has a historical annual return of 8.7% to 12.4%.
It’s hard to ignore.
Fundrise requires a minimum investment of $10, which is very cheap, and makes it easy for you to start investing in real estate without investing all your money in real estate or expensive REITs.
Read more: Can you make money in real estate? Here’s what the experts say
5. Put money in a savings account
If you don’t have an emergency fund, you should definitely put some money into a savings account. The traditional advice is to set aside six months’ worth of expenses in a reserve fund.
Once you have this amount set aside, look for investments with higher returns.
Read more: Reserve funds: everything you need to know
6. Try peer-to-peer lending
Peer-to-peer lending is a way to lend money to someone who needs it. It could be anything: a business idea, student loans, or just paying off credit card debt.
The advantage of peer-to-peer lending (or P2P lending) is that your returns can be much higher than if you invested in stocks or bonds. However, the risk is much higher as many people do not repay the loan on time or not at all.
If you’re going to consider peer-to-peer lending as an option to invest some of your $20,000, be sure to do as much research as possible.
You can read our reviews of two of my favorite peer-to-peer lenders: LendingClub Bank as well as Prosper. Before you dive into P2P lending, be sure to do your research because the risk is significant.
Read more: Should you invest in peer-to-peer loans?
7. Pay for education
My dad once told me that the only thing no one can take away from you is your education. It has stayed with me to this day because it is true.
You can lose all your money in the stock market. Your business may fail. But if you have a good education and degree, this will never go away.
If you don’t have a college degree, consider pursuing a degree in a field that you really enjoy but is still in demand in the market. If you already have a college degree, consider pursuing an advanced degree, such as a master’s or Ph.D.
Inexpensive (and even free) training options
If you’re not going to invest your $20,000 in formal education, you can invest some of it (or none) in improving your skills and spend the rest on something else on this list.
- Udemy it is a marketplace for thousands of online courses. They almost always have sales and you can often get really good lessons for less than $15. You can search by topic and then by popularity to see which ones are selling. You can also review the course syllabus before purchasing so you know exactly what to expect.
- Coursera is a great option if you need more formal or business skills. For example, if you want to learn about business operations, you can take the Coursera course. All courses are offered in partnership with a major university or company, and all are self-paced.
- Khan Academy has a cool backstory – Salman Khan was a lawyer (among other things) and decided he wanted to make videos to help people learn some pretty complex topics like personal finance. Over time, this has grown into a full-blown non-profit organization that is now partnered with Bank of America. They have a wide variety of topics, including topics for children, and most of the content is videos with step-by-step explanations.
8. Pay off debt
One of the best ways to get a return on your money is paying off debt at high interest rates.
Yes, believe it or not, one of the best investments you can make is paying off debt, especially your credit cards. If you don’t have credit cards, pay off any other debt you have.
Read more: How to pay off credit card debt quickly
Think of it this way: the money you end up saving on interest by being debt-free will far outweigh any return you find in the investment market today. This includes real estate, stocks, fine art, or anything else.
The math here is also simple. Let’s say you have a credit card with an interest rate of 15%. If you redeem this card, you will actually earn 15%. And it’s a quick return that doesn’t involve any research or speculation, as it can with stocks or real estate.
And maybe even worse than that. Let’s say you have a personal loan at 25% (yes, it can be). If you only pay the minimum payment every month, it will end up costing you a huge amount of money. Money that you might otherwise reinvest.
If you’re deeply in debt and have money to invest, now is the time to cut back on your credit cards, stop using them, and focus on paying off your debt. And that $20,000 will definitely make a dent.
Summary
Remember that diversification is key, especially with this kind of money. I would advise you not to put all your eggs in one basket unless you really know what you are doing.
An exception is investing with a robot advisor. I would feel perfectly comfortable investing $20K in a robotic advisor knowing that my money would be well diversified. Just make sure you mix up the types of your accounts (for example, retirement and ordinary investment accounts).
Regardless of what you do, the most important thing is not to let this money just sit in your checking account, otherwise you will lose a whole world of opportunities.