Smart Ways To Invest Your $25K Windfall

If you're looking to invest £25k or $25k, there are a number of options available to you. It's important to first consider your financial goals and risk tolerance. If you're looking for a quick profit, you might want to consider higher-risk investments such as stocks and shares, whereas if you're looking for somewhere safe to keep your emergency fund, a high-yield savings account or certificate of deposit (CD) may be the best option.

If you're looking to make your money grow, investing in real estate, either through a down payment on an investment home or a real estate investment trust (REIT), could be a good option. You could also consider investing in stocks, bonds, or retirement accounts, or even starting your own business.

Before making any investment decisions, it's important to do your research and understand the risks involved. It may be worth speaking to a financial advisor to get personalised advice based on your circumstances.

High-yield savings accounts

• No-Risk Investment: High-yield savings accounts offer a no-risk investment option with a decent return on investment (ROI). The funds are FDIC-insured, so your money is protected up to $250,000 even if the bank fails.
• Competitive Interest Rates: These accounts typically offer much higher annual percentage yields (APYs) than standard banks, sometimes up to 10 times higher than the national average rate.
• Liquidity: High-yield savings accounts are great for keeping your cash liquid and easily accessible for unexpected expenses. You can earn interest on your funds while still having the flexibility to withdraw when needed.
• Minimum Balance and Fees: Some high-yield savings accounts have minimum balance requirements to earn the advertised APY. Others have no minimum balance requirements, making them accessible to all savers. Be sure to review the account details to understand any fees, such as monthly maintenance fees or withdrawal penalties.
• Online Accessibility: Many high-yield savings accounts are offered by online-only banks, providing the convenience of managing your account and transferring funds digitally.
• Comparison Shopping: It's important to compare the interest rates and account features across different banks and credit unions. Websites like NerdWallet and Bankrate offer helpful tools and reviews to find the best high-yield savings accounts.
• Barclays Tiered Savings Account: 4.50% APY for balances up to $250,000, and 4.80% APY for balances above $250,000. No minimum balance requirement and no monthly fees.
• SoFi Checking and Savings: 4.20% APY on savings balances with direct deposit or $5,000 in qualifying deposits every 30 days. No minimum balance requirement and no monthly fees.
• CIT Bank Platinum Savings: 4.55% APY on balances of $5,000 or more. $100 minimum opening deposit and no monthly fees.
• American Express High Yield Savings Account: Competitive yield with no monthly fee and no minimum balance requirement. $1 minimum to start earning interest.

Stocks and shares

If you're new to investing, you may want to start with an index fund that follows a popular benchmark like the S&P 500 or the Nasdaq 100. These funds give you instant portfolio diversification. Some of these funds have hundreds of different stocks that cover multiple sectors.

When you buy any fund or ETF, it is a good idea to check the fund's positions, historical performance, and expense ratio. The fund's top 10 holdings show where most of your money will go. Investors should feel comfortable with a fund's top investments before buying shares.

A fund's historical performance will indicate if it is consistent or if it has choppy returns. The stock market endures volatility and requires a long-term approach. However, some investors have lower risk tolerances and may not want funds that have dramatic price swings.

The expense ratio is also important. This represents how much you pay to put your money in the fund. A higher expense ratio reduces your total returns, and you pay it on the value of your investment. Even if the fund loses money, you still have to pay the expense ratio. Luckily, many quality index funds, mutual funds and ETFs have expense ratios under 0.20%.

If you have no immediate need to access your money and are prepared to accept a degree of risk, you could consider investing in the stock market. The minimum investment timeframe for stocks and shares is at least five years.

If you decide to invest in stocks and shares, you can mitigate some risk by diversifying your investment portfolio. This means buying shares in different types of companies and in other regions around the world. That way, low-performing investments are usually balanced by ones doing well.

By investing in a stocks and shares ISA, you can shelter any gains and dividend income from the taxman. You can invest in a cash and stocks and shares ISA during the tax year, providing your total contributions do not breach the annual limit.

Real estate

A $25,000 investment in real estate could be a sizeable down payment on an investment property. You can leverage the investment with mortgage financing and earn monthly rental income, plus capital appreciation on the property.

However, real estate investments are highly illiquid, so you need to be prepared to keep your funds locked up for several years.

There are a few different ways to invest in real estate with $25,000:

• Invest with other like-minded investors into a real estate syndication.
• Partner with another real estate investor(s) to buy a property.
• Invest in a property in a market out of state with lower purchase prices ($100,000-$125,000).
• Invest in any priced property with negotiation, for example, seller carry-back financing.
• Invest in a 3% down primary residence that you rent = house hack.
• Invest in a 2nd home (to be a rental) using a vacation home loan, only 10% down for these loan types.
• Borrow capital from a hard money lender or private lender to perform a BRRRR (buy, renovate, rent, refinance, repeat), where you get your capital returned in 6-12 months but own the property.
• Invest in a primary residence home as a live-in flip with only 3% down, where you improve the house while living there and then sell.
• Invest in a REIT (Real Estate Investment Trust), a publicly traded stock only invested in real estate projects.
• Invest as a private lender to another real estate investor for an interest rate and return.

Retirement accounts

With a traditional retirement account, you can make pre-tax contributions, meaning you'll only pay taxes when you withdraw from the account. This is beneficial because you will likely be in a lower income tax bracket when you retire and start making withdrawals.

On the other hand, Roth retirement accounts don't lower your current tax bill, but the withdrawals are tax-free. This includes capital gains or dividend distributions within the account.

If you're employed, it's a good idea to start with your employer's matching program. These programs offer free money as long as you contribute. Your employer will match a certain percentage of each contribution up to a designated limit.

Paying off debt

If you have $25,000 in cash to invest, one option is to pay off existing debt. This can be a wise investment decision, as it effectively earns you a guaranteed return equal to the interest rate on the debt. For example, paying off a $3,000 debt with a 12% interest rate would result in savings of $360.

Before investing your cash, it is important to evaluate your financial situation and goals. If you have high-interest debt, such as credit card debt, it is generally advisable to prioritise paying it off. This is because the interest rates on these debts often exceed the returns you could expect from other investments. By paying off this debt, you can improve your financial situation and free up money that can be redirected towards other investments.

• Reduce your interest rates: Contact your credit card issuers and request a rate reduction if your credit score has improved or if you are facing financial hardship. You may also be able to refinance student loans and personal loans to secure a lower interest rate.
• Debt consolidation: Consider consolidating your debts into a single loan, typically at a lower interest rate. This can streamline your debt and make it more manageable.
• Create a budget and payoff strategy: Decide on a repayment timeline and develop a budget that aligns with your income, lifestyle, and desired timeframe. This may involve cutting back on expenses or finding ways to increase your income.
• Debt repayment strategies: Two popular approaches are the debt avalanche and debt snowball methods. The debt avalanche focuses on paying off the debt with the highest interest rate first, while the debt snowball targets the smallest debt first to provide quicker psychological boosts.
• Increase income and reduce spending: Consider taking on a side hustle or freelance work to boost your income. Additionally, look for ways to cut down on expenses, such as cooking at home instead of eating out or cancelling unnecessary subscriptions.
• Seek professional help: If you feel overwhelmed, consider contacting a credit counsellor or a non-profit credit counselling agency. They can provide advice and assistance in negotiating and managing your debt.

Remember, paying off debt is an important step towards financial freedom. It may seem daunting, but with a sensible plan and disciplined execution, you can achieve your goal of becoming debt-free.

Frequently asked questions