Smart Ways To Invest $20,000

If you have $20,000 to invest, you may be wondering how to make the most of it. The best way to invest this money depends on your goals and risk tolerance. Here are some options to consider:

- Pay off debt: Paying off debt may not seem like a traditional investment, but it can provide a better return than other options. For example, if you have credit card debt, the average interest rate is 22.77% APR, which is challenging to consistently earn through other investments.

- Build an emergency fund: An emergency fund can help you stay afloat during unexpected expenses or job loss. It's recommended to save three to six months' worth of living expenses in a high-yield savings account.

- Max out retirement accounts: Retirement accounts like IRAs and 401(k)s offer tax advantages for building your nest egg. You can increase or max out your annual contributions with this sum.

- Invest in an index fund: Index funds offer low costs, broad diversification, and attractive returns by tracking a specific market index like the S&P 500.

- Open a brokerage account: With $20,000, you can explore various investment options such as stocks, bonds, options, mutual funds, and cryptocurrencies through a brokerage account.

- Invest with a robo-advisor: Robo-advisors use algorithms to build and manage a diversified investment portfolio based on your goals and risk tolerance.

- Invest in fine art: Online platforms have made investing in fine art more accessible, allowing you to invest in fractional shares of artworks by renowned artists.

- Invest in real estate: While $20,000 may not be enough to purchase property, you can invest in real estate through ETFs, REITs, or crowdfunding platforms.

- Build a CD ladder: With CD rates offering over 5% APY, you can create a CD ladder by dividing your deposit among multiple CDs with different maturities to manage interest rate changes and maintain liquidity.

- Fund a college savings account: Investing in a 529 college savings plan can help you save for education expenses, including K-12 and college-level tuition.

Max out your retirement accounts

If you have $20,000, you can increase or max out your annual retirement contributions. Here are some steps you can take:

Contribute to your workplace retirement account

If your employer offers a retirement plan, such as a 401(k) or 403(b), find out if they will match your contributions up to a certain amount each year. This is known as an "employer match". Once you know their policy, calculate how much you need to contribute to reach the maximum employer match. This is essentially free money, so it is beneficial to contribute at least enough to your employer's plan to receive the full match.

Contribute to a health savings account (HSA)

If you are enrolled in an HSA-eligible health plan, consider contributing the maximum amount to your HSA. With an HSA, you can often split your contributions into invested money for long-term savings and cash for qualified medical expenses. You can get three tax benefits for contributions: an initial tax deduction, tax-free potential earnings, and tax-free withdrawals when you use the money for qualified medical expenses. For 2023, the contribution limit is $3,850 for individuals or $7,750 for families. Those aged 55 and older can contribute an additional $1,000 as a catch-up contribution.

Contribute the maximum allowed to your workplace savings plan

If you have already contributed up to the employer match, you may want to save more for retirement by maxing out your 401(k). The maximum amount you can contribute to a 401(k) depends on your age. For those under 50, the limit is $22,500 in 2023 and $23,000 in 2024. If you are 50 or older, you can add a catch-up contribution of $7,500, bringing the total limit to $30,000 for 2023 and $30,500 for 2024.

Contribute to an individual retirement account (IRA)

Another option is to contribute to an IRA, which is not connected to an employer. There are several types of IRAs, including Roth IRAs and traditional IRAs, each with different benefits and requirements. You can contribute to one or multiple IRAs, as long as your combined contributions do not exceed the annual limit. For 2023, the limit is $6,500, or $7,500 if you are aged 50 or older.

Add after-tax money to your 401(k)

If your employer allows, you can add after-tax money to your 401(k) beyond the individual contribution limit. For 2023, the combined employer and employee contribution limit is $66,000, or $73,500 if you are 50 or older.

Consider investing in brokerage accounts

Once you have maximised your contributions to tax-advantaged retirement accounts, you can continue saving and investing in regular brokerage accounts. While the tax advantages may not be the same, you still have the potential for long-term growth and flexible access to your money.

Robo-advisors

• Wealthfront: Best Overall, Best for Goal Planning, Best for Portfolio Management, and Best for Portfolio Construction. It offers sophisticated financial planning, customized portfolios, and up to $1 million in FDIC insurance. Its fees are 0.25% for most accounts, with no trading commissions or fees for withdrawals, minimums, or transfers.
• Betterment: Best for Beginners and Best for Cash Management. It offers robust cash management features, customizable asset allocation, and multiple goal-setting options. Its fees are 0.25% annually for investing plan accounts with at least $20,000 or at least $250 in monthly recurring deposits; otherwise, there is a $4 monthly fee.
• M1 Finance: Best for Low Costs, Best for Sophisticated Investors, and Best for SRI (socially responsible investing). It offers low-cost, customizable portfolios and a huge list of pre-built portfolios. Its fees are $100 ($500 minimum for retirement accounts).
• Vanguard Digital Advisor: One of the largest robo-advisors by assets under management (AUM), with a focus on retirement planning. It offers access to Vanguard's investing expertise and ETFs at a low cost. Its fees are approximately 0.15% per year, with a $3,000 account minimum.
• SoFi Automated Investing: Offers free portfolio management and access to certified financial planners, with a 1% match on IRA contributions. However, it has limited account types and no tax-loss harvesting.

Brokerage accounts

When choosing a brokerage, consider the fees involved, the investment options available, and the level of support and resources provided. For example, J.P. Morgan Self-Directed Investing offers $0 stock and ETF trades, low-cost mutual fund trades, and a broad range of research tools.

Before investing, it's important to research and understand the different types of securities available and their associated risks. Creating a diversified portfolio can help minimize investment risk and provide more consistent returns over time.

Additionally, it's worth noting that investments in a brokerage account are subject to capital gains taxes, whereas retirement accounts offer tax deferral or tax-free growth. This is an important consideration when deciding how to allocate your $20,000.

High-yield savings accounts

• DCU Primary Savings Account: The only savings account that offers 6% APY. You can earn 6.17% APY on balances up to $1,000.
• My Banking Direct High-Yield Savings Account: Pays 5.55% APY on balances of $1 or more. It also doesn't charge any monthly services.
• EagleBank High-Yield Savings Account: Pays 5.38% APY on balances up to $500,000.
• Western Alliance Bank High-Yield Savings Premier Account: Offers 5.36% APY on the entire account balance. It has no account activity or maintenance fees.
• BrioDirect High-Yield Savings Account: Offers a competitive rate of 5.30% APY and doesn't charge monthly maintenance fees.
• Forbright Growth Savings: Offers a high 5.30% APY. It also has no minimum opening deposit and no monthly service fee.
• Ivy Bank High-Yield Savings Account: Pays 5.30% APY on balances between $2,500 and $1 million.
• TAB Bank High-Yield Savings Account: Pays a high interest rate with no monthly maintenance fee.
• NexBank High Yield Savings Account: A top high-yield savings account on Raisin, a platform that lets you use one platform to find, fund, and manage multiple high-yield savings accounts and CDs.
• BMO Alto Online Savings Account: A good choice if you want to open a savings account with a $0 minimum opening deposit and get a competitive savings rate.
• Betterment Cash Reserve: Offering a promotional APY boost to new customers. With the APY boost, you can earn 5.50% APY for three months.
• Synchrony High-Yield Savings Account: One of the best online savings accounts because it has no minimum opening deposit, and it charges zero monthly fees. It also comes with an ATM card so you can access your savings quickly.

When choosing a high-yield savings account, make sure you can afford the minimum deposit. You should also check whether there is a monthly service fee and if there are any requirements to earn the highest interest rate.

Dividend stocks

• Diversify your portfolio: Instead of investing all your money in just one or two stocks, consider diversifying across several stocks and different industries. This will help spread the risk and ensure that your portfolio is not overly exposed to any one stock or industry.
• Look for high dividend yields: Aim for stocks with dividend yields between 5% and 8%. The average dividend yield for the FTSE 100 is currently around 3.5%, so investing in stocks with higher yields can potentially provide a higher income stream.
• Focus on established companies: Many of the best dividend stocks are shares of well-established companies that have a history of paying consecutive and consistent dividends. These companies tend to be more focused on providing stable and reliable dividends rather than aiming for high growth.
• Assess the company's financial health: Dividends are typically paid from earnings, so it's important to look for companies with healthy sales and profit outlooks. Ensure that the company's earnings are large enough to comfortably cover dividend payments.
• Consider reinvesting dividends: If you don't need the income from dividends, you can choose to reinvest them to potentially increase your returns over time.
• Evaluate the stock's payout ratio: The payout ratio tells you how much of the company's income is going toward dividends. A payout ratio that is too high (generally above 80%) may indicate that the company is putting a large percentage of its income into dividends, which could be unsustainable in the long run.
• Be cautious of high dividend yields: While a high dividend yield may seem attractive, it can also be a red flag. It could indicate that the company's stock price is falling or that the dividend payout is unsustainable.
• Consider tax implications: Keep in mind that dividends in taxable brokerage accounts are taxed in the year they are received. For investors in high-income brackets, dividend stocks may not be the most tax-efficient option.
• Pennymac Mortgage Investment Trust (PMT)
• Franklin BSP Realty Trust Inc. (FBRT)
• International Seaways Inc (INSW)
• Angel Oak Mortgage REIT Inc (AOMR)
• Civitas Resources Inc (CIVI)
• CVR Energy Inc (CVI)
• Evolution Petroleum Corporation (EPM)
• Altria Group Inc. (MO)
• Insteel Industries, Inc. (IIIN)
• Washington Trust Bancorp, Inc. (WASH)

Remember, investing in dividend stocks carries risks, and past performance does not guarantee future results. It's important to do your own research and consult with a financial advisor before making any investment decisions.

Frequently asked questions