Smart Ways to Invest $10,000 in 2020
Not everyone has $10,000 lying around, but if you recently came into some money—maybe through a bonus or big promotion at work—then it’s time to put that cash to work for you.
That means investing the money in ways that allow you to take advantage of the “miracle of compound interest.” In short, compound interest is your return on investment from the original amount invested as well as any accumulated interest earned on the money. For example, if you invest the $10,000 and earn 8% every year, after one year your total amount from that investment equals $10,800. Then, in the next year, instead of earning 8% on $10,000, you'll earn 8% on $10,800.
Not every investment returns 8% on a dependable basis, but no matter how much you're earning, the key is to invest as early as possible to maximize your returns. There are ample opportunities to make that $10,000 grow. You can get started by steering the money into the following investments.
A 401(k) Plan
Popping money into your 401(k) is always a good idea. Your 401(k) plan will likely handle your investments for you, putting your cash into a carefully considered mix of stocks, bonds, and funds that will maximize your long-term growth. Plus, some companies offer to match 401(k) contributions. If your company matches up to 6% of your contributions, for example, then your $10,000 401(k) deposit instantly becomes a $10,600 deposit.
The Stock Market
The average annualized total return for the S&P 500 index over the past 90 years is 9.8%—that makes the stock market a good bet. In 2017 alone, the S&P 500 returned 21.8%. It's important to remember, however, that past results aren’t indicative of future performance. Stocks suffer through rough years and broad downturns from time to time. In 2018, for example, the S&P 500's annual returns were negative (roughly -5%). But if you can afford to not touch the money for at least a couple of years, the stock market is likely a good place to invest that $10,000.
Although $10,000 isn’t usually enough to invest directly in the real estate market, it is enough to get you into a real estate investment trust (REIT) or real estate-themed exchange-traded fund (ETF). REITs and real estate ETFs are both essentially investments in the groups that deal in real estate, whether it's home-flippers, real estate agencies, or rental unit management. Both investments offer benefits any investor would love, including high liquidity (they’re easy to trade, like a stock or a bond), diversification (most funds include a wide variety of real estate investments), and, perhaps best of all, you don’t have to actually get your hands dirty rehabbing or repairing a home.
Individual Retirement Account (IRA)
An individual retirement account offers access to solid stock and bond market returns, along with significant tax advantages. That's because the government wants you to save for retirement, so it offers tax incentives for people who contribute to their IRA. You will pay taxes on the money eventually, but for most people, IRAs will help them ultimately save on taxes and prepare for retirement. In 2020, the maximum amount you can put into an IRA is $6,000 for people under 50 years old. If you’re over 50 years old, you can make an extra “catch-up” contribution of $1,000.
A “Robo” Investment Account
Robotics-based investment accounts, or "robos," offer an easy way for novice investors to put that $10,000 to work. Robo-advisory firms like Betterment and Wealthfront are user-friendly and do most of the investment work for you. Most services simply require you to answer simple questions, then the company automatically chooses your investments and periodically rebalances your portfolio. Another benefit to robos is that their fees are often lower than that of a traditional advisor, and you likely won't have to pay trade commissions (because you won't be making trades yourself).
Invest in Yourself
The financial markets aren’t the only place you can get a good return on your money from a $10,000 investment—not by a long shot. You can go back to school or take online classes to earn a degree and add value to your career prospects. If you don't think a new degree will help your career, you might consider professional designations and certification programs that could lead to a higher income and more career satisfaction. The compound interest on this type of investment might not be as easy to measure in dollar amounts, but it comes with its own set of advantages.
Reduce Credit Card Debt
One last way to use $10,000 to your advantage is to pay down significant debt. Paying off thousands of dollars in credit card debt can help improve your credit rating, not to mention curb or eliminate the high interest rates you may be paying on your debt right now. Once you can take credit card debt payments off your monthly budget plan, it'll add to your overall income—not to mention take the stress of debt off your mind. The same goes for other forms of significant debt, like student loans or mortgages. In this case, you aren't measuring the compound interest of your returns, but the compound interest you won't have to pay on every dollar of reduced debt.