If you want to receive passive income from your investments, there are many ways to do it. While your best choice will depend on certain factors such as your age and risk tolerance, there are many ways to invest $20,000. The right investment options for you will depend on what your long-term goals are. You can also work with a financial advisor to help you choose your investment options.
Invest in a retirement account
Investing in a retirement account is often one of your best options, especially if you haven’t invested much yet. Retirement accounts, such as a 401(k) or individual retirement account (IRA), have tax breaks as an incentive to stash your money in them. That means you get to keep more of your money.
How to prioritize different retirement accounts depends on your situation. Some employers will match your contributions, so it makes sense to invest at least until the match. On the other hand, IRAs usually give you more control over your investments. Your situation and investment goals will dictate how you should prioritize different retirement accounts. However, these accounts can provide great passive income later on.
Pay off debt
You may not think of paying off debt as an investment, but it could be a good move. If you have a lot of debt and receive $20,000 all at once, getting rid of your debt can yield the best returns. For example, you may have a lot of credit card debt with an APR of 15-20%. Unfortunately, even the most savvy investors can’t achieve such high returns – at least not consistently. Paying off your debt can put you on the right track; not only will it put you in a better position today, but it also means you will have to pay less interest in the future.
Open a High Yield Savings Account
If you don’t already have an emergency fund, this is the perfect opportunity to change that. You can use a high-yield savings account to earn passive income from the money in your emergency fund. Of course, having an emergency fund helps ensure you have cash in case something unexpected happens. But having cash on hand has the added benefit of helping you avoid high-interest debt when these things happen. For example, you can avoid putting big expenses on a credit card, building up more of that debt we discussed earlier.
Invest using a brokerage account
Brokerage accounts are investment accounts that you open with a broker, such as an online broker. These brokers often have minimal fees. They can also offer even more freedom than an IRA because they have no early withdrawal penalties. But they also lack the tax benefits of IRAs, so brokerage accounts are usually best for investing money you need before age 59 ½. Nevertheless, diversity in your tax strategy can be beneficial. You can withdraw money slowly as your investments grow, giving you some passive income.
Invest in dividend stocks
If you specifically want passive income, consider dividend stocks. Dividend stocks are often paid quarterly, usually with a yield of between 2% and 5%. Stocks that pay dividends are generally well-known, financially stable companies, so risk is typically low compared to other stocks. However, you can find a similar (or better) rate with a high-interest savings account when interest rates are high.
Invest in real estate
Real estate is one of the oldest forms of investing and can still provide high returns today. It can also be a great source of passive income. You can’t buy a lot of houses for $20,000, but that doesn’t mean you can’t invest in real estate. There are many ways to buy real estate stocks today. For example, you can invest in a real estate ETF, a real estate mutual fund (REIT), or you can try real estate crowdfunding. You can get started with $1 or maybe even less in some cases. If real estate is your investment of choice, $20,000 can go a long way in today’s economy.
It comes down to
In general, creating significant passive income takes a lot of time, a lot of money, or both. $20,000 won’t create enough passive income to sustain you, but it can give you a good head start. You can choose to pay off debt, open a high-yield savings account, or start investing. No best strategy works for everyone; getting started is most important. That way you will start earning passive income from your $20,000 as soon as possible.
Tips for investing
Financial advisors help investors analyze different investment options and can help create an action plan to achieve their goals. Before investing in passive income investments, consider talking to an advisor to understand how it fits into your portfolio. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisor matches for free to decide which one is right for you. If you are ready to find an advisor who can help you achieve your financial goalsstart now.
When investing your money, it is important to spread your wealth across many different types of stocks and bonds. This helps you gain exposure to multiple sectors of the market and capitalize on their growth. Our asset allocation calculator helps you select a profile that’s right for you based on your answers to simple questions.
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