Whether you’re in your 20s, 30s or whichever age, investing is one of the best ways to attain financial freedom. Instead of tucking that money under your couch, it’s better to store it somewhere where it’ll gain more value at a rate that beats inflation.
Now that you’ve saved enough money and you’re ready to invest (or was it an inheritance?), you’re wondering what to do with $20k.
Truth is while investing is great, there are some things to consider before dipping your toes wet in the world of investing.
Factors To Consider Before Investing
1: Ensure your high-interest debt is paid.
It’s tempting to forgo paying that high-interest credit card and instead invest the money in stocks. Clear all that bad debt before investing because even if the stock market gains +7% in returns, with a credit card having 15% on interest, you’ll still be short on money to repay while the interest continues to accumulate.
2: Create an emergency fund.
Emergencies rarely happen but when they do, it’s better to be well prepared on what to do. What happens if you lose your job today? Do you have enough money set to handle any issues in the near future?
A strong emergency fund should be able to cater for at least six months.
3: Take care of your family
Similar to setting an emergency fund, take care of the basic needs of your family first – if you have. Have your kid’s health insurance well handled and the immediate needs met.
Remember you’re investing for the long term. So, know how to handle immediate issues and don’t focus on withdrawing the money just yet.
4: Learn the basics
It’s never a good idea to invest in something you barely know. Whichever the market you choose to invest in, take some time to learn the basics.
You don’t have to know everything there is to know about investing. But having knowledge of basic investing will enable you to know when the next stock market crash is happening and get you prepared. (For example)
5: Diversify your portfolio
Depending on your age and what your goals are, there are several ways to invest that money. Most people in the 20s have a higher risk tolerance hence they choose markets with higher volatility since they promise higher rewards.
As the age range progresses, people in the late 40s and beyond have the low-risk tolerance, therefore, the best places to invest include low-risk bonds and CDs.
Whichever the assets you choose, diversify the portfolio to reduce overall risk exposure.
5 Best Ways To Invest $20K
1: Start your own business.
Starting a business is expensive and in most cases, you’ll lose money on the first and second try. If you have experience in business before, it is okay to invest $20K completely since you know what you’re doing.
If you don’t know much about running a business and wish to start one, it’s a great idea to start with as little as possible. This way, you stand to lose a small portion while gaining the necessary experience.
2: Put In a High-Yield Savings Account.
High yield savings accounts are similar to regular savings account only that they offer more interest rates. While a regular savings account offers 0.1% on interest, the high yield accounts offer even more than 2% APY.
Most have a minimum amount needed to qualify for the account. Some have as high as $5000 as initial deposit hence with $20K, you can make a decent return on your investment.
The high yield accounts are FDIC insured hence should you lose money, you stand to be compensated up to $250,000.
3: Invest in mutual / index funds.
Mutual funds are brokerage firms run by fund managers. They invest in different types of assets and are categorized into different types. There are stock mutual funds which mainly invest in stocks, bond mutual funds investing in bonds, etc.
There are also the general mutual funds which mix assets from stocks to bonds, metals, and exotics, etc. Index funds are also a type of mutual funds that invests passively in indexes such as the S&P and Dow Jones.
They can provide a better return than savings accounts. The key is finding a good fund manager.
4: Invest in stocks.
Stocks have higher volatility than bonds but the return is better too. The minimum required for stocks though is $25,000 hence you might want to hold on until you have that amount.
Stocks are not highly volatile and can be highly rewarding if you’re patient enough to hold for the long term. Think Warren Buffett.
Alternatively, you could invest in the futures. Futures are a type of contract where assets are bought or sold at a predetermined price but paid at a later date in the future. The assets commonly involved are financial instruments such as shares.
Futures have a lower entry amount therefore, with $10,000 you can start investing.
5: Invest with a Robo advisor.
Robo advisors are online platforms that use the computer algorithm to manage a client’s portfolio. They create the portfolio according to your risk tolerance and the capital amount. You can completely let them manage without your intervention but it’s never a good idea to let a robot manage your money hands-free.
Constantly check in and track its progress. In forex, expert advisors are common and traders let them identify signals then open positions for them. Traders just check in to track the progress and tweak to ensure it’s working optimally.
If you’d like an expert advisor for your forex trading, Best Fx Robo advisor has a VIP trading package for 270 days.
Investing money requires patience and you have to do due diligence. Whether it’s Robo advisors or starting a business, having the knowledge in what you’re doing gives you a greater edge. You can always find something to invest in irrespective of your age or risk tolerance.