Your investment portfolio is a reflection of your financial goals. You could invest in stocks if you won’t need the $20k for another 10 years, but stocks are higher risk – with higher potential returns.
If you’ll need the money in three years, you may consider a less-risky investment type with modest returns, such as a CD or bond.
Here’s one example of how a 20k portfolio might look if you’re aiming for higher returns over a longer period of time:
CDs and bonds
0 to 40%
Stocks, ETFs and mutual funds
50% to 75%
Real estate and alternative investments
0 to 25%
To make the most of your investments, you may need a new brokerage account.
Our pick: Interactive Brokers
Interactive Brokers offers an impressive range of tools and low fees for active or professional investors.
Create watchlists, set alerts and follow news on the Trader Workstation platform
Choose from IBKR Pro or IBKR Lite depending on your investing style
All users older than 21 must meet a $20,000 liquid net worth requirement for a cash account
Before you invest $20k, make sure you have the following in place:
Emergency fund. Ideally, you’ll keep three to six months of expenses in a high-yield savings account. Depending on your cost of living, this could be a small or large portion of your $20k.
No high-interest debt. Paying off debt before you invest means you won’t have sky-high interest payments eating into your investment returns.
Kids’ college fund. If you have children, you may consider setting aside a portion of the $20k for their college education.
Invest in your 401(k)
Your employer deducts 401(k) contributions straight from your salary, so you’ll need to increase your contribution percentage to invest more money. This will make your take-home pay smaller, but you can supplement the missing income with your $20k investment.
Company match. You earn free money when your employer matches your contribution.
Tax-sheltered account. You pay into your 401(k) with pre-tax dollars, which lowers your tax bill for the year.
Illiquid investment. If you touch the funds before you’re 59 and a half, you’ll pay an early withdrawal penalty.
Can’t make direct contributions. Your employer takes 401(k) contributions out of your paycheck, so you can’t make a one-time contribution.
Required minimum distributions. The IRS forces you to take distributions from your 401(k) at age 70 and a half, which means your assets have less time to grow and you could get bumped into a higher tax bracket.
How do I calculate my required minimum distribution (RMD)?
Calculate your RMD by taking your account balance as of December 31 and dividing it by your life expectancy factor on the IRS Uniform Lifetime Table.
Life expectancy factor
115 and over
If you have $250,000 in your 401(k) and you just turned 75, your RMD is $10,917.03 for the year.
What if I don’t have access to an employer-sponsored 401(k)?
If you don’t have access to a 401(k), don’t fret. Individual retirement accounts, or IRAs, are another option for those looking to invest and prepare for retirement.
IRAs come in several forms, the most popular being Traditional and Roth IRAs. Traditional IRAs allow you to make tax-free account contributions up until you’re 70 and a half years old. The catch? Your account withdrawals are taxed once you start receiving distributions.
Roth IRAs, on the other hand, tax your contributions going in but withdrawals made once you retire are tax-free. Roth IRAs are particularly popular among younger investors and are sometimes also available in 401(k) form.
If you’re considering opening a new retirement account and don’t know where to start, a financial advisor may be able to help you pick the right one.
Invest with a robo-advisor
If you want professional guidance on how to invest without forking over money for a financial advisor, a robo-advisor may be what you need.
Automated strategies. Robo-advisors make portfolio recommendations based on your goals, risk tolerance and timeline.
Maintenance-free. Most robo-advisors keep your portfolio aligned with your ideal asset allocation through automatic tax-loss harvesting and rebalancing.
Low fees. You’ll typically pay lower fees with a robo-advisor than you would with a traditional advisor.
Limited recommendations. The level of personalized advice you receive depends on the company’s AI, and some offer better advice than others.
No in-person support. There’s not an actual financial advisor you can pick up the phone and call when you have questions.
Invest in a brokerage account
If you’re more of a hands-on investor, $20k is more than enough to get started with a major online broker.
Variety. Many brokers offer stocks, mutual funds, bonds, ETFs and options.
Freedom. You have full control to invest however you want.
Help when you need it. Many top online brokers offer investment advice in the form of extensive research centers, in-person support and automated investment strategies.
Potential mistakes. You could make costly mistakes with your $20k if you don’t have a lot of investing experience.
Fees. Many online brokers are moving toward a commission-free model, but there are still some that charge hefty fees.
Compare other online stock-trading platforms
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Invest in real estate
There are several crowdfunding sites that let you invest in real estate with as little as $5k or $10k.
Generates income. Most real estate investments generate monthly or quarterly dividend payments.
Pre-vetted properties. Many crowdfunding sites pre-vet offerings, so you don’t have to find a local property yourself.
Tax deductions. When you invest directly in real estate, you can write the asset’s depreciation off on your taxes.
Illiquid investments. Real estate is an illiquid investment because there’s no guarantee a buyer will be available when you’re ready to sell.
Some require accreditation. If you can swing the minimum payment, you may need to be an accredited investor to qualify for some crowdfunding platforms.
Variable fees. Fees vary depending on the platforms and individual investments.
Invest in peer-to-peer lending
With peer-to-peer lending, you loan your money out to other individuals in need.
Profitable returns. Many peer-to-peer lenders have seen returns above 6%, according to a 2018 Forbes article.
Simple. Investing through peer-to-peer lending is much simpler than choosing stocks for the first time.
Passive income. Receive monthly payments as borrowers repay the principal and interest on their loans.
Risky. Some borrowers may default, so mitigate risk by funding several loans from multiple borrowers.
Can’t get out of the loan. Once you commit to lending out funds, you can’t sell the loan to someone else.
There are a lot of different ways you could invest $20k. Your best option depends on your current financial situation and goals.
Cassidy Horton is a writer for Finder, specializing in banking and kids’ debit cards. She’s been featured on Legal Zoom, MSN, and Consolidated Credit and has a Bachelor of Science in Public Relations and a Master of Business Administration from Georgia Southern University. When not writing, you can find her exploring the Pacific Northwest and watching endless reruns of The Office.
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