There is no denying that $20,000 is a lot of money. Depending on your current financial situation, that might mean a year’s worth of college tuition, a car, or even a down payment on a new home. The point is, you’ve got options. However, when all else is equal, you might wonder how I invest this money that will produce the greatest possible returns?
While you might be looking for a “guaranteed” winner, we’ll have to be honest: there is no such thing as a risk-free investment. Perhaps even more importantly, there is no such thing as an investment strategy that will make sense for absolutely everybody. Still, even keeping this in mind, some approaches to personal investing are much wiser than others.
So, want to know where you should invest your $20k? Let’s take a close look at a few options you might have available and discuss the pros and cons associated with each.
Option One: Put it All on Black (or Red?)
Wow—you just came into $20,000 of wealth (or built it up over time—we don’t know who you are), and you know what’s even better than $20,000? $40,000.
This is why we’d recommend taking all of the money you have, turning it into a few casino chips, and betting all of them on the roulette table. At a roulette table, black turns up just less than half the time, and red turns up just less than half the time. So, whether you prefer one over the other, we recommend going all in.
Sounds insane? Yeah, it is. Many people who have a little bit of wealth, say $20,000, are very eager to turn that into a lot of wealth overnight. Unfortunately, there are very few ways to double your wealth in such a short amount of time without taking any huge, avoidable risks. Growing your personal wealth involves the careful balance of two simultaneous, sometimes competing goals: preservation of existing wealth and accumulation of additional wealth. However, there are quite a few ways you can slowly increase your wealth over time, as we will further discuss below.
Option Two: Invest in Real Estate
Okay, maybe the casino route didn’t quite work out. Or maybe it did. But now you are wondering where you should invest your additional winnings (hint: don’t go back to the roulette table). Regardless, you are probably looking for options where you can invest your money in a way that will benefit you both now and in the future.
One of the first places you should look at is the real estate market. On average, the value of real estate in the United States has increased by about 11 percent per year, higher than the stock market. In 2021, specifically, the median home price went up 16 percent. Investing in real estate also benefits you from owning tangible assets and potentially being able to live in a house. As much as you might want to, you can’t “live” in a stock.
Real estate is an excellent investment for several reasons. Unlike stocks or the dollar, real estate is physically limited and can easily maintain its value (you can’t just “print” new houses). Additionally, because housing is a basic human need, it’s presumed to always remain in demand.
However, you should only invest in real estate if you can keep up with the ownership costs. These costs include interest attached to your mortgage, property taxes, increased utilities, private mortgage insurance (PMI, when applicable), homeowner’s insurance, annual maintenance, etc. In other words, real estate might not be the “perfect” investment many people imply it is. Still, even keeping these things in mind, investing in real estate is generally a great way to accumulate wealth over time while improving your overall quality of life.
Option Three: Put it in Your 401(k)
A 401(k) is a unique type of employer-sponsored retirement plan that enables (and often obliges) your employer to match the contributions you make to your retirement savings. In the best-case scenario, every contribution you make to your retirement savings will be matched by your employer, helping you significantly increase the amount of money you can grow over time.
To many people, the option to have your employer match their 401(k) account is essentially considered “free money.” Though you will not be able to physically access this money until you retire, at least without penalty, these people are generally correct. If your employer currently offers a 401(k) matching plan—or even a partial matching plan—this is a perfect place to begin investing your money. Once all of your basic financial needs have been met, this is an excellent place to further push your existing assets.
Option Four: Invest in an Index Fund
If you are looking to become an investor, the first place you should probably look is investing in an index fund. On average, the S&P 500 Index—an index containing about 500 of the nation’s largest companies, often used as a general gauge of the economy—has grown at a rate just short of 10 percent per year. That means, on average, you can expect a $20,000 investment to be worth about $22,000 in a year.
There are a few reasons why investing in an index fund is good. Compared to more conservative investment options, such as keeping your money in a savings account, your wealth will grow much faster. At the same time, you’ll avoid the risks that come with investing in a single stock—instead of asset-specific growth, you’ll be able to enjoy the market’s growth as a whole.
Option Five: Paying Down Existing Debt
Coming across $20,000 is great, but if you have existing debt, you should probably prioritize paying down your debt. Investing in an index fund, as we mentioned above, can be a generally good idea. But when you have debt that is growing at a guaranteed rate of 18 percent per year (common for many credit cards, auto loans, student loans, and other types of debt), you have to prioritize debt over an investment that could only possibly generate 10 percent per year.
In other words, it’ll be a good idea to prioritize your most damaging sources of debt—as measured by APR. If you do have $20,000 available to invest, consider starting by paying down your high-interest sources of debt.
Option Six: Choose a Conservative Investment Option
Generally, you want your investments to generate more growth than the national inflation rate, which recently hit 8.5 percent per year. However, if you are risk-averse, you might sacrifice additional growth to preserve your capital.
While there are no investments that will be guaranteed to yield more than the national inflation rate, there are quite a few that will be more productive than putting your money in a savings account (which probably pays almost zero percent per year). Investing in federal bonds, certificates of deposit (CD), and other “conservative” investments, at the very least, will be better than keeping your money in basic savings.
Conclusion
The investment that makes the most sense for you will depend on many factors, including your risk tolerance, long-term financial goals, liquidity, and many other factors. Be sure to explore all available options before making any final decisions.
