How to Invest $20K Wisely in 2023

The more money you have, the more options you have to invest. If you’ve set aside $20,000 to invest, you’ll have many more choices than if you start with just a few dollars.

Although it may seem like the options that require you to have a certain amount of money like $1,000 or even $10,000 to start investing would be superior to investments with lower barriers to entry, that isn’t necessarily the case. If you’re trying to figure out how to invest $20K, consider these smart options.

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How to invest $20K

Each individual may choose how to invest $20,000 differently, depending on their situation.

Put some in a high-yield savings account

If you haven’t built your emergency fund, that could also be a smart way to invest some of your $20K. 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 lose your job.

Keeping money in one of the best savings accounts is a great way to keep an emergency fund accessible while still earning some interest on your money. High-yield savings accounts offer higher than average interest rates than traditional savings accounts. For instance, the average APY for a traditional savings account is 0.45% (as of Sep. 20, 2023), and certain high-yield savings accounts may offer APYs of up to 5.0% (as of June 26, 2023).

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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Pay off your debt

According to the Federal Reserve, the average credit card account that assessed interest in February 2023 had a 20.09% interest rate. People with credit card debt could get a quick win by using $20,000 to pay that debt down.

Paying down your credit card balance removes the costly interest expense. It could even remove the monthly payments if you pay off the card in full. Then you can use your newly freed-up cash flow to start investing every month instead of paying expensive interest charges.

Pad your retirement account

People who’ve already built an emergency fund and have their high-interest debt under control may want to consider using $20K for retirement savings. Investing in a retirement account could give you tax benefits today or in the future. 

It could also allow your investment portfolio to grow over the long term as long as you don’t need the money until you reach age 59 1/2. Just remember that all investments come with the risk of loss, and past performance isn't a guarantee of future returns.

An investment strategy of setting aside money for more extended periods could result in massive growth thanks to compounding returns. For instance, if you invest $20,000 as a 30-year-old and receive an 8% annual rate of return, that money would grow to $325,850 when you’re 65.

You have several options to invest $20,000 in a retirement account, but you have to be careful about annual contribution limits. You most likely won’t be able to invest the full $20,000 in a lump sum.

Retirement account options

You could start saving for retirement by investing some of it in a workplace 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.

One common workplace retirement account is a 401(k). These plans offer one of the higher annual contribution limits. In 2023, you can contribute up to $22,500 per year if you’re under age 50. Those age 50 and over can contribute up to $30,000 per year, thanks to the additional catch-up contributions the IRS allows.

You may not have access to a workplace retirement plan, though. In this case, you could decide to open other types of retirement accounts. 

One of the most common options is an individual retirement account. In 2023, these accounts allow you to contribute up to $6,500 if you’re under age 50 or $7,500 if you’re 50 and over. 

Although there are no income restrictions with a traditional IRA, if you choose to open a Roth IRA, your contributions may be limited based on your income.

Invest with a robo-advisor

A robo-advisor, such as Wealthfront, may be a suitable solution for your investment goals if you’d prefer a more hands-off approach to investing.^{1 2} 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, it will typically ask you questions to determine your risk tolerance, investing style, and other preferences. Then it uses algorithms to set up portfolio allocations that work for you based on your situation. Robo-advisors typically invest your money in exchange-traded funds, which are normally diversified and low-cost investments.

Robo-advisors may also provide other benefits to help manage your investments and potentially increase your returns. For instance, Wealthfront offers portfolio rebalancing, tax harvesting, and free financial planning.

Choosing a robo-advisor could be a smart move if you want to invest $20K and aren’t interested in actively managing your portfolio. It allows you to start investing today and avoid putting off the task. This gives you more time to keep your money in the market.

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Put some money into a brokerage account

If you want more control over your investments than a robo-advisor offers, you may want to consider opening one of the best brokerage accounts. 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 your distributions and earnings, so they aren’t tax-deferred. You don’t get a tax deduction for contributing to them or tax-free income in retirement, either. Despite the lack of tax benefits, if you're interested in investing money with short-term goals in mind, a taxable account could potentially be a good option. Just remember that all investing comes with the risk of loss.

You can also open an investment account with a financial advisor if you want someone to manage your investments for you. Many brokerage firms also offer managed investment options. Generally, there are fees associated with these options.

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Get started in real estate

Figuring out how to invest in real estate with $20,000 may seem impossible. A common misconception is that the only way to invest in real estate is by buying property for rental income, but that isn’t the case.

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.

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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.

This fund reinvests any dividends it pays out, but it isn’t traded on the stock market. Instead, you may only be able to sell back shares to Fundrise quarterly. Depending on your situation, this could potentially be a drawback because you can’t sell your shares at any time. Even so, it’s an opportunity to invest in real estate without owning an entire property.

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Consider peer-to-peer lending

Peer-to-peer lending allows you to directly loan money to individuals looking for a loan, and it could potentially be a good way to invest some of your $20K. 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.

Peer-to-peer lending could be a smart investment option if you’re looking for a unique way to diversify an already established portfolio. That said, it does have unique risks you must account for within your investment plan.

What to consider when you’re investing $20K

It’s important to consider a few aspects before investing your money to make sure you get the most out of it.

Your most important financial goals

Reflecting on your financial goals should help you figure out the best use for your money. For instance, if you want to provide a stable financial foundation for your family, paying off credit card debt and building an emergency fund may be at the top of your list. Those who’ve already met those goals may want to start investing for retirement instead.

When you might need your money

Before you decide how to invest money, it’s important to consider when you’ll need the money. In general, it could be a good idea to keep the money in more conservative, low-risk investments if you need it in a short period of time. This could help to limit potential losses. If you have a decades-long time frame for investing, you may be able to take more risks because you have more time to recover from market downturns.

Potential tax advantages

Is there a way to invest your $20,000 that could improve your tax situation now or in the future? For example, if you can invest some of your funds in a Roth IRA or 401(k), you pay taxes on those funds now so you can withdraw them tax free in your retirement. An accountant or financial planner can help you determine what the tax consequences could be for your investments. 

Your 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.

But investors who don’t like watching their portfolio balances decrease might choose to invest more conservatively. Investing according to your risk tolerance can help you maintain a portfolio that works for your situation.

Fees, minimum investments, etc.

Each type of investment has its own set of fees, minimum investment requirements, and other features you’ll likely want to 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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The bottom line

The best way to smartly invest $20K likely differs based on your current life and financial situation. It can be a good idea to set a stable foundation before dabbling in more unique investment options. One person may be best suited to paying down credit card debt, whereas another individual may want to diversify their portfolio by adding peer-to-peer loans.

Whatever you do, don’t let your options paralyze you. The key is getting your $20,000 working for you. If you can’t choose just one option, consider splitting your money between several for diversification. Then you can adjust your investments moving forward and add to the ones you feel most comfortable with.