How to Invest 20k

Learn how to build a $20,000 investment portfolio

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If you are a new investor, you probably dream of building a seven-figure investment portfolio. But before you make millions through investing, you have to start somewhere. In fact, you can easily get started with just $20,000. Here are some tips on how to invest 20k.

Before You Get Started: Cover Your Financial Needs

Investing $20,000 is a great target to aim for. But you may have other financial obligations that are more important in the short term. Before funneling all of your assets into your investments, consider these important financial goals:

Build an Emergency Fund

An emergency fund is a savings account dedicated to financial emergencies. Emergency savings are vital for unexpected costs like a broken-down car, major home repair, or another financial emergency. They are also helpful in the event of an unexpected job loss, such as a layoff. Most advisors recommend maintaining an emergency fund equal to the amount you earn in three to six months.

According to data from the Federal Reserve, about 40% of households in the United States can't afford a $400 emergency. If that sounds like you, it's a good idea to put funds into your emergency fund before focusing on investing.

The best place to keep an emergency fund in most cases is in a high-yield savings account. This type of account often has the best interest rates and gives you fast access to your cash, and it's FDIC insured. Betterment Cash Reserve account is one of the few services that stand out, as it works in conjunction with partner banks. This gives you more FDIC protection than with the typical savings account.

Pay Off Your Debt

If you are sitting on a big pile of high-interest debt, it could be a good idea to pay off that debt before funneling too much money into your nonretirement investments. For example, if you have a credit card that charges 20% or more in interest, you would save more by paying it off than you would earn with a 10% return from investing that same amount in the stock market.

Paying off debt is an important priority that can free up your money for future investments. Outside of lower interest, a long-term debt like a mortgage or student loan, it's a good idea to pay off your debts before putting too much effort into investing $20,000.

1. Invest in an Employer-sponsored Retirement Account

If you have your financial needs covered, then it's time to start building your investment balance. Automatic transfers and automatic investment plans are some of the easiest ways to build a large portfolio balance without even thinking about it.

One of the best places for any American to invest is their tax-advantaged retirement account. Accounts like a 401(k), traditional IRA or Roth IRA offer tax advantages. These can save you a small fortune on taxes.

The first investment for many people is in their employer-sponsored 401(k) plan. This is a great place to get started with investing since it's automatic.

The biggest downside of many 401(k) plans is high account management fees. If your investment options are limited to only high-fee funds, your investments will grow more slowly. And it’s even worse if the options don't include the types of investments you would choose.

However, employer matching and the tax benefits of a 401(k) usually far outweigh any downsides. If you have access to a 401(k), 403(b) or 457 plan with an employer match, take advantage of it. After all, that is free money!

2. Invest in a Self-directed Retirement Account

Employer-sponsored accounts almost always come with high fees and limited investment choices. But you can open a tax-advantaged traditional IRA or Roth IRA at whatever brokerage you want. The best IRA accounts don't charge any recurring fees. And they give you access to virtually every stock and ETF. And they don't charge trading commissions.

  • A traditional IRA is a pre-tax account, just like a 401(k). That means you don't pay tax on the income when you invest but do pay tax on withdrawals in retirement. Your retirement tax rate will likely be lower than your present tax rate.
  • A Roth IRA is an after-tax account. This means you pay tax on the income you contribute but don't pay tax on qualified withdrawals in the future.

If you have a long time horizon before retirement, a Roth IRA is usually the better choice because of the tax you don't have to pay on the money the investments make over the years. If you're closer to retirement, you may benefit more from a traditional IRA. The choice depends on which way you save more on taxes.

Both traditional and Roth IRA accounts have annual contribution limits set by the IRS. For 2020, the maximum you can contribute is $6,000 if you are less than 50 years old. If you're over 50, you can contribute up to $7,000. But income limits may apply. If you earn more than a certain amount (see hyperlink above), the amount you can contribute to this type of account will be lower.

Learn more: Best IRA accounts

3. Invest With a Robo Advisor

Robo advisors are a newer type of investing platform. With a robo advisor, a computer picks your investments based on a short survey you complete when signing up. Whether you're saving for a shorter-term goal or a major long-term milestone, the robo advisor will try to pick the right portfolio for you. Most robo advisors offer both taxable and retirement accounts.

Robo advisor portfolios are not based completely on algorithms. They are generally based on highly researched portfolio allocations created by human portfolio managers. If you are in your early 30s and saving for retirement, for example, your needs are going to be very similar to other people in their early 30s saving for retirement, so you could get similar portfolios.

The scale and technology behind robo advisors make them typically much cheaper than traditional financial advisors and planners. The best robo advisors charge 0.25% or less per year or charge a small flat fee. Some are even free!

Most robo advisors use exclusively low-fee ETFs to build investment portfolios. If you don't know much about investing or just want someone else to handle everything for you, robo advisors are the most cost-effective way to do it. Here are our favorite ones:

HighlightsPersonal CapitalBettermentM1
Minimum to Open Account$100,000$0$0
401(k) Assistance
Two-Factor Auth.
Advice OptionsAutomated, Human AssistedAutomated, Human AssistedAutomated
Socially Responsible Investing

4. Invest in Stocks with a Brokerage Account

If you are savvy about the stock market or want to pick your own portfolio of stocks, mutual funds, ETFs, and other investments, you probably want a traditional brokerage account. While these accounts don't have any special tax benefits, they allow you to make deposits or withdrawals and buy or sell investments with few limits.

A brokerage account works like a bank account in many ways, but instead of holding only cash, it can also hold investment products. Many brokerage accounts let you use checks that make it easy to withdraw funds or make purchases directly with your investment profits.

Like retirement accounts, you can set recurring deposits into your brokerage account to slowly build up your portfolio over time. If you contribute $100 per week, it will take less than four years to reach a $20,000 balance, not factoring in any investment gains (or losses). At Investor Junkie we find Ally Invest is one of the best brokers for beginners due to its low fees and excellent customer service. Started Investing with Ally Invest.

Learn more: Best brokerage accounts

5. Create a College Fund for Your Kids

The cost of college in the United States has skyrocketed in recent decades. If you have kids, you may want to get a head start on helping them pay for the cost of higher education. In addition to taxable brokerage accounts and custodial accounts, you can open a tax-advantaged 529 college savings account.

529 plans work like Roth IRA accounts in many ways. Contributions are made with after-tax dollars, but qualified withdrawals in the future are tax-free. You can use funds for tuition, fees, books, and other education costs. You can even use it to pay tuition at private elementary and secondary schools.

If you have leftover funds in a 529, you can rollover the account to a sibling, with no tax implications. You can even assign it to yourself for that art or technology class at the local community college you've always wanted to take.

You can sign up for a 529 account through your state's 529 plan, another state's, or through a financial planning service. Just make sure to look at the available investments and withdrawal rules before officially signing up. You want to be sure the plan has the options you want.

6. Invest in Real Estate

One of the most popular things to invest in is rental real estate. But unlike buying a share of stock, an investment property requires a huge financial outlay and quite a bit of long-term work and commitment.

In addition to buying rental properties directly, you have several routes to invest in real estate with smaller cash outlays and commitment levels.

Real estate investment trusts (REITs) are a type of stock or fund where you invest exclusively in real-estate investments. Regulations require a high portion of the REIT's income to be distributed to investors as dividends. You can buy REIT funds and real estate stocks with any brokerage account.

For a more direct investment, you can look into real estate crowdfunding platforms like Fundrise, Crowdstreet or Streitwise. These allow you to invest alongside others in projects that directly purchase real estate.

Minimum Investment$10$25,000$5,000
Account Fees1%/yearNone2% annual management fee
Private REIT

7. Invest in Peer-to-Peer Lending

Peer-to-peer lending (P2P) is when you make loans to borrowers and earn interest on their payments. Just as a bank earns interest when it makes loans to its customers, you can earn by lending to others through a P2P platform. The type of loan can range from credit card consolidation, home improvement, and just about anything else people might need funds for.

One of the popular P2P lending platforms include Prosper . Just be aware that if the borrower stops paying, your personal investment is at risk. When the borrowers make successful payments, the lending platform takes a small portion of the payment as a fee.

Peer-to-peer lending is a popular alternative to stock market investments. With a diverse portfolio, many investors see positive returns. As long as you understand the risks and can invest for the three- to five-year required time horizon, this could be a good addition to your investment plan.

Align Your Investments With Your Needs

$20,000 is a great investment goal, but it's not just about how much you invest. It's also about how you invest. It's important that you take the time to understand where you're investing and why. You could find that you are on track to meet your goals, but you might find that your investments need a tune-up to better match your personal risk tolerance and goals.

Investing in any of the accounts above is a great method to reach your investment goals of $20,000 and beyond. If you stick with it, you'll be on the road to making thousands before you know it! But it all starts with that first investment dollar. If you have yet to invest, getting started today is a great decision.

Eric Rosenberg

Eric Rosenberg is a finance, travel and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full time. He has in-depth experience writing about banking, credit cards, investing and other financial topics and is an avid travel hacker. When away from the keyboard, Eric enjoys exploring the world, flying small airplanes, discovering new craft beers and spending time with his wife and little girls.

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