How to Invest $20K in 2024 | Stash Learn

How to invest $20K

Published: May 14, 2024

• Updated: Sep 05, 2024

You’ve done it—you’ve accumulated $20,000. Whether through diligent saving, a fortuitous inheritance, a lucky lottery win, or some other means, you’re now faced with a pleasing but daunting question: how best to invest this amount of money? With a myriad of investment options available, the choices can be overwhelming, especially for beginner investors navigating this kind of windfall for the first time. Key factors such as your investment timeframe, risk tolerance, desired returns, and overall goals will heavily influence the best strategy for you.

In this article, we’ll take a step-by-step approach to explore various investment avenues including paying off debt, contributing to retirement accounts, working with brokerage and robo-advisors, and even investing in yourself—a critical and often overlooked strategy.

Start strong by paying off any debt

Best for: people with high-interest debt or who haven’t set up an emergency fund

Before sprinting down the investment track, it’s crucial to ensure you’re on solid footing. For many, this means addressing high-interest debt head-on. The rationale is simple yet compelling – the returns from paying off a debt with a 30% interest rate dwarf those from typical investments.

Aim to eradicate these financial burdens as swiftly as possible. Simultaneously, consider establishing an emergency fund if you haven’t already, laying a safety net for unforeseen financial storms.

Stash 100 tip : Don’t pay more than the minimum required for low-interest, fixed-rate loans. If your fixed rate loan is low enough, invest the extra dollars for a higher return.

Contribute to a 401(k)

Best for: Those saving for retirement

A 401(k) is a retirement savings plan sponsored by an employer, designed to help employees save for their future retirement. In 2024, the current yearly contribution limit is $23,000 a year or $30,500 if you’re 50 or older. The contributions are usually made pre-tax from your paycheck, and some employers may also offer a match on your contributions.

Investing in a 401(k), especially if your employer offers matching contributions, is akin to receiving ‘free’ money. Additionally, contributions to a traditional 401(k) reduce your taxable income and grow tax-free until withdrawn in retirement.

Pros	Cons
Contributions are pre-tax, lowering your taxable income	Limited investment options chosen by employer
If employer matching is offered, this extra money grows your retirement savings further	Early withdrawal penalties and taxes may apply if accessed before retirement age
Automatic contributions taken out pre-tax can help build discipline and consistency	Required minimum distributions (RMDs) at age 72

Consider maxing out your Roth IRA

Best for: Those saving for retirement

Another retirement account option is an individual retirement account like a Roth IRA. The Roth IRA differs from a traditional 401(k) in that contributions are after-tax—money from your paycheck after income taxes have been deducted. If your employer doesn’t offer a 401(k) plan or if you’re self-employed, consider opening up and contributing to a Roth IRA.

Roth IRAs provide a unique opportunity for tax-free growth and withdrawals in retirement, making them incredibly appealing for long-term investment strategies. The current yearly contribution limit for 2024 is $7,000 a year or $8,000 if you’re 50 or older. With your $20k, fully contributing to a Roth IRA, and exploring other investment avenues with the remainder, could be a wise choice.

Pros	Cons
Tax-free growth and withdrawals in retirement.	Contributions are not tax-deductible like traditional IRAs.
Flexibility compared to traditional IRAs, allowing for early withdrawals without penalties.	Income limits may restrict eligibility for high-income earners.
No mandatory distributions after a certain age, giving more control over when to withdraw funds.	Early withdrawals are limited and may incur taxes and penalties.

Stash 100 investing tip : Consider multiple accounts. If you’re eligible for an employer-sponsored plan like a 401(k) and an individual retirement account like a traditional or Roth IRA, you may want to take advantage of both simultaneously—they each have their own pros and cons.

Investing with a brokerage account

Best for: Those who want to manage their investment portfolio

A brokerage account is a type of investment account that allows you to buy and sell a variety of investment options such as stocks, bonds, ETFs, mutual funds, and more. Unlike retirement accounts which have restrictions on how much you can contribute yearly and when you can access your money, brokerage accounts offer greater flexibility and control over your investments.

Stocks: Stocks are shares of ownership in a company, providing potential for growth and dividends.
Bonds: Bonds are loans to companies or governments, offering fixed interest payments and return of principal at maturity.
Exchange traded funds: ETFs (exchange-traded funds) allow you to invest in a basket of securities, providing diversification with one investment.
Mutual funds: A mutual fund is a pooled investment containing many stocks and other assets within a single fund.
Commodities: Commodities are physical materials such as gold, silver, oil, or agricultural products that can be invested in through futures contracts or ETFs.
Real Estate Investment Trusts (REITs): REITs are investment vehicles that allow you to invest in real estate without owning the physical property.
Cryptocurrencies: Cryptocurrencies are digital or virtual currencies that use blockchain technology and have gained popularity as a form of investment.

Pros	Cons
Greater control and flexibility over investment choices	Higher risk due to potential market fluctuations
Potential for higher returns compared to traditional savings accounts	Brokerage fees can eat into investment profits
Diversification through various types of investments	Requires more active management and monitoring of investments

Let a robo-advisor invest for you

Best for: New investors wanting support or hands-off investors

For those daunted by the prospect of investing $20k without clear guidance, a robo-advisor offers a compelling solution. By automating investment decisions based on your risk tolerance and goals, robo-advisors simplify the investing process, making it accessible for beginner investors.

Pros	Cons
Low fees compared to traditional financial advisors.	Lack of human advice and personalized guidance may not suit all investors.
Offer automated, hands-off investment management, making it ideal for beginners or busy individuals.	Limited control over investment decisions.
Utilize algorithms and diversification strategies to optimize portfolios based on your risk appetite and goals.	May not adjust to market changes as quickly as a traditional financial advisor might.

Invest in your future-self

Best for: every single one of you

While all of the options mentioned above should be considered investments in yourself, investing in yourself through education and personal development has numerous benefits. Taking a career development course or attending a conference can expand your knowledge and skills, potentially making you more valuable to employers or clients.

By pursuing new ways to grow and develop now, you are essentially investing in your future self, setting yourself up for long-term success and fulfillment.

FAQs about how to invest $20K

Is it worth investing $20,000?

Absolutely. Investing $20k wisely can lead to substantial financial growth, especially when leveraging the benefits of compounding interest over time.

What is the best investment for 20K?

The best investment strategy for your $20k depends on your personal circumstances, financial goals, and risk appetite.