Best Way to Invest Twenty Thousand Dollars

Best Way to Invest Twenty Thousand Dollars
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Whether the $20,000 your considering investing is from an inheritance, bonus or legal judgment, you can make your life more comfortable by carefully considering the next steps for your money. Financial writer Liz Pulliam Weston suggests taking time to make considered decisions, rather than rushing into anything. Several Bankrate.com advisers suggest setting aside a small amount, up to 20 percent, as "fun money" for a treat such as a vacation or some nice meals out.

Reduce Debt

If you are carrying high-interest debt such as credit card balances, your best returns might well come from paying down that debt. Bankrate.com advisers suggest putting at least one-third of the money on debt, focusing on those debts with the highest interest first. This is especially smart when a debt has an interest rate higher than the average savings or investment return, which can easily be the case with high-interest cards. If you pay off a card with a 15 percent interest rate, this is the same result as getting a 15 percent return on your investment.

Create an Emergency Fund

Consider this step purchasing peace of mind. Financial experts from the Department of Labor suggest having between three to eight months' savings in case of financial emergency such as unemployment or accident. To calculate your emergency fund goal, add up your basic living expenses for a month, and multiply that number by the number of months you are saving for. This emergency fund can also be useful for unexpected expenses, such as automotive or appliance breakdown.

Invest in Retirement

If you have a 401(k) with your employer or an IRA, it is usually a good idea to contribute the maximum allowed annually, from a tax perspective. Experts from Smartmoney.com note that if you have an employee match in your 401k, you could be getting the equivalent of a 25 percent to 50 percent return. When contributing to an IRA, you gain tax advantages over other investments that may make this option more sensible than investing in a typical taxable investments.

Invest Beyond Retirement

Once you've cleared debt, boosted your emergency savings and planned for retirement, you can think about investing whatever is left. Most advisers suggest investing in stocks and bonds, typically in mutual funds. The advisers at Motley Fool suggest looking for investing only in funds that cost less than 2 percent of the transaction value to avoid fees from negating your earnings. Many beginning investors start with low-cost index funds as a good way to jump-start a diverse portfolio with less risk than picking individual stocks.