How to Invest $20K to Maximize Earnings

Setting and reaching a savings goal is an incredible feeling, one that inspires you to reach more goals. A few years ago, I set the bar high and committed to saving $20,000, a huge milestone. While I’m not a financial advisor, I used the knowledge I had to make the most of my $20K, so I didn’t leave it sitting idle in a low-paying savings account.

I started by paying off the $4,000 of credit card debt I had. I knew carrying that debt would deplete any earnings I made, so that was my first step. Next, I put $3,000 in a high-yield savings account because I wanted to pad my emergency savings a little more for peace of mind.

With those two tasks complete, I was ready to begin investing. I started with a robo-advisor, investing $5,000 into a mildly aggressive portfolio. I knew I could take some risks with this money since I could leave it long-term and ride out any losses.

Since I was on a kick to save for my long-term goals, I also invested $5,000 in an IRA to boost my retirement savings. The rest of the money went to real estate investments with Fundrise. While I knew I couldn’t purchase a property outright with only $20K, I felt good about diversifying my assets across many different avenues.

The good news is that the options I chose worked — and didn’t require a lot of money. I could even have invested as little as $1,000 in some of my picks and still seen great results. Check out how I invested the money I saved to reach my bigger goals.

Everyone has a different risk tolerance or investment preference. There’s no right or wrong way to invest, but here’s what I did, along with what you could do if you end up in a similar situation.

Put some in a high-yield savings account

An emergency fund is a must for everyone, no matter how much money you have or make. An emergency fund can offer you peace of mind that your living expenses will be covered in the event that you're unable to work or if you lose your job. They can also cover other surprise expenses like flying to a last-minute funeral, going to the emergency room, etc.

I decided that keeping money in a savings account as an emergency fund was a priority. I prefer high-yield savings accounts versus traditional savings accounts at my local bank or credit union because they pay much higher interest rates.

Often, online banks offer the best bank accounts because they don’t have the overhead costs of running an extensive bank branch network. Lower costs allow them to pay higher interest rates than national brick-and-mortar banks.

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Paid off debt

According to the Federal Reserve, the average credit card account that assessed interest in the first quarter of 2024 had a 21.59% interest rate. While my credit card rates weren’t quite that high, I knew I would see an instant return on my investment if I paid off my credit card debt.

Here’s why.

Paying down my credit card balance removes the costly interest expense and the monthly payments for every card I pay in full. Freeing up that cash every month was great because I had even more money to invest.

Pad a retirement account

It’s important to always think about your future, and investing in retirement accounts often has tax benefits. If you have money to set aside until retirement, your funds can grow tax-deferred.

Diversifying your investments is key because all investments risk loss, and past performance doesn’t guarantee future returns. Stick to the IRS guidelines for maximum contributions each year to avoid unnecessary penalties.

Retirement account options

Many people have several ways to save for retirement, including a 401K and Individual Retirement Plan. Some workplaces match your retirement contributions up to a certain point, such as 3%. If you aren’t already taking advantage of this workplace perk, you could be missing out on free money.

The IRS limits the amount you can contribute annually. For example, in 2024, you can contribute up to $23,000 per year if you’re under age 50. If you're 50 or above, you can contribute up to $30,500.

If you’re like me and don’t have access to a workplace retirement plan, you can open other types of retirement accounts, such as a traditional or Roth IRA.

In 2024, you can contribute up to $7,000 if you’re under age 50 or $8,000 if you’re 50 and over.

A traditional IRA doesn’t have income restrictions, but if you choose to open a Roth IRA, your contributions may be limited based on your income. I suggest checking with your tax advisor before making a decision.

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Invest with a robo-advisor

Robo advisors are great because they set up investments on your behalf. I use Wealthfront because I prefer a more hands-off approach to investing.³⁴ If you’re wondering how they work, robo-advisors use technology to help set up and maintain your investments on your behalf. They normally do this for a much smaller fee than an in-person financial advisor would charge.

Many in-person financial advisors only work with clients who have at least $100,000 or more in investable assets. Robo-advisors have much smaller minimum balance requirements, and some may not have a minimum balance requirement at all.

When you sign up with a robo-advisor, they will ask questions to determine your risk tolerance, investing style, and other preferences. It then uses algorithms to set up portfolio allocations that work based on your situation. Robo-advisors typically invest your money in exchange-traded funds, which are normally diversified and low-cost investments.

Robo-advisors also offer features such as portfolio rebalancing, tax harvesting, and free financial planning.

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If you’re interested in going this route, check out more of our picks for the best robo-advisors.

Put some money into a brokerage account

If you want a little more control over your investments than a robo-advisor offers, consider a brokerage account. Most brokerage firms offer these accounts, including Vanguard, which is known for its low-fee investment options.

A taxable brokerage account allows you to invest in anything the brokerage firm provides. Investment options often include stocks, mutual funds, index funds, ETFs, certificates of deposit, bonds, and much more. You choose what and when you buy and sell.

Taxable brokerage accounts typically don’t have annual contribution limits. They also don’t offer as many tax benefits as retirement accounts, though. With a taxable brokerage account, you’re required to pay taxes on the distributions and earnings, so they aren’t tax-deferred. Despite the lack of tax benefits, a taxable account could potentially be a good option for your short-term goals. Just remember that all investing comes with the risk of loss.

If you’re interested in going this route, check out more of our picks for the best brokerage accounts.

Invest in real estate

Most people assume you need hundreds of thousands of dollars to invest in real estate. The truth is you can make real estate investments with as little as $1,000 (sometimes even less), you just have to know how.

You can invest in real estate in several ways, including putting some money into REITs (real estate investment trusts). REITs hold real estate within a company you can own shares of. This way, you get to participate in any gains associated with the real estate within the REIT. Of course, you could also lose money, depending on how the REIT performs, but this is my favorite way to invest in real estate.

Several real estate crowdfunding websites also allow investors to start investing in real estate without purchasing a full property. Some of these websites allow only accredited investors, though. To qualify as accredited investor status, you must have a high income or net worth.

Other crowdfunding sites, such as Fundrise, allow virtually anyone to invest in REITs. Fundrise’s lowest entry point product requires only a $10 minimum initial investment. Of course, you want to invest more than $10 to see decent returns, but this shows that it’s possible to invest in real estate no matter how much money you have.

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Consider peer-to-peer lending

Peer-to-peer lending is another alternative investment you can consider for your $20K. With peer-to-peer lending you directly loan money to individuals looking for a loan. Websites, such as Prosper Marketplace, assist with this process by matching borrowers with people who have money to lend.

The websites take a cut to facilitate the process while allowing borrowers to get the money they need. Typically, these loans can pay higher interest rates than you’d earn by leaving cash in a savings account, but there’s some risk involved. If the borrower quits making payments, you could lose your investment in that loan.

What to consider when you’re investing $20K

Financial goals

Knowing what you want to do with the money you saved is important. You don’t want to risk wasting the money, so planning is essential.

Write down your goals and see how to maximize your funds so you see the greatest capital gains and can achieve things like saving for retirement, buying a house, or paying off credit card debt.

When you might need the money

Deciding how to invest money is extremely important, as is knowing when you need it. Any money you need relatively soon, put in a liquid account, such as a high-yield savings account or CD. It’s important to put any funds needed in the short-term in low-risk accounts, or those with FDIC protection so you don’t realize a loss.

However, any money you don’t need within the next 12 to 24 months, consider putting in riskier investments because you have more time to offset the losses after any market downturns. While stock and ETF investments don’t have the same FDIC protection, they have greater potential for larger returns in the long run.

Potential tax advantages

I’m always on the lookout for ways to save on taxes, which is why a portion of the $20K I had to invest went into my retirement accounts. The key, however, is leaving the funds untouched at least until retirement age. I didn’t invest all the funds I didn’t need immediately in retirement, but I met the limits to take full advantage of the tax breaks.

Risk tolerance

Your risk tolerance can influence your suitable investment choices. Investors who are able to wait out big market swings can generally invest more aggressively to potentially earn larger long-term returns. However, investing more aggressively could potentially result in bigger losses, too.

Decide if you’re the type of investor who takes a lot of risks, or who needs only safe investments. You could also consider investing in both types to diversify your portfolio.

Fees, minimum investments, etc.

Each type of investment has its own set of fees, minimum investment requirements, and other features that you should carefully consider before investing. For instance, more complex investment types managed by financial advisors on your behalf often come with higher fees than what you might see with a robo-advisor.

In-person financial advisors often have high minimum investment requirements and annual assets under management fees of 1%. Robo-advisors commonly have small minimum initial investment requirements, if they have them at all. Their fees are generally lower, as well.

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Bottom line

This quick insight into how I invest $20K can help guide you in your investment choices. How each person chooses to use their money depends on their current life and financial situation. I highly recommend creating a stable foundation, such as paying off credit card debt and saving an emergency fund before jumping into other options.

Even if you don’t feel ready to handle the entire amount, just get the money working for you, even if that means putting it in a high-yield savings account. I chose to diversify my efforts to really make my money work for me, but every investor’s situation is different, and you should choose the path that makes you feel the most comfortable.

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