Here’s What to Do with $20,000 Right Now
I recently received an email from a friend asking for money advice. I told her that while I couldn’t give her direct advice, I could write something up for my general readership, since this is a question I often get. Here is her note:
I have $20k that I’m interested in investing right now. But I would love an option that would allow me to add my bonuses to it semi-annually/quarterly, since we don’t use that money towards our day-to-day expenses, but rather just for fun stuff like home improvement and travel. It’s just overwhelming to even know what to do initially. That money has been sitting in my bank for months and I’ve been dragging my feet. It just feels foolish to let it sit there for more months/years/decades getting bigger and not really helping. We also have 15k in emergency savings. Where do we start?
Ok. Here’s what I’d suggest for the average person with some savings, looking to finally start putting that money to work…
Start thinking about your accounts like a row of buckets.
Spending buckets (your checking accounts), emergency buckets (savings accounts), investment buckets (brokerage accounts, IRAs, 401(k)s, etc.).
First Up, Your Spending Buckets
You will get dummy rich at a really fast pace if you simply spend way less than you earn and sock away everything you can. You’re already saving and thinking about investing, which already puts you ahead of 95% of the American population.
You probably know this, but there’s always room for improvement here.
For example, by thinking about investing and saving in large chunks, rather than small regular increments, you might be losing out a bit.
For example, if you want to have a million in cash sitting in the bank in 10 years, you will need to put $2,000 aside every week. Oof. That’s a lot.
That number goes down drastically if you’re investing conservatively, though.
If you invest every week in an asset that compounds at 10% (meaning it pays income that gets reinvested into the same asset), you would only need to invest $1,150 per week to get that same amount of money over the same 10 years.
Feel like you can wait 20 years? This number only needs to be $300 invested per week.
(Invest $2,000 per week and get 10%, and you’d be there in about 7 years.)
The key is: Consistency and compounding beats almost every investment strategy you will ever read about. Every time.
By waiting to add bonuses to your investments semi-annually/quarterly, you’re missing out on some of that compounding effect. Your results get much lumpier and less predictable.
So keep that in mind.
You don’t need to be crazy frugal or a miser or anything… But every person I know who got insanely rich without striking a jackpot? They did it this way: consistently socking away every dollar they could into conservative investments.
Next Up: Your Emergency Savings
The fact that you have dedicated emergency savings delights me. This is something most people simply don’t do.
Now here’s something you should consider: The amount of emergency savings you have? It’s a nice round number. But life doesn’t work with round numbers.
How much you have put aside for emergencies should be about 3-6 months of what you spend per month, on average.
Seriously: Sit down with your last three bank statements, cross out all the random non-recurring “fun” purchases, add up everything else (mortgage payments, groceries, bills, etc.), and divide it by 3 to get that average-expenses-per-month figure.
Multiply that average-expenses-per-month figure by 3 and that will give you an emergency savings target if you want to be more aggressive. Multiply it by 6 if you want to be more conservative. And multiply it by 12 if you’re a chronic worry-wort. The final figure will be your emergency savings target.
Doing this will allow you to set your emergency savings without having to guess about what it should be.
If you find out you’re over-prepared? You can move some of that money into your “investment” bucket. Under-prepared? You should move some of the money from your investment bucket back to emergency savings.
Figure this out before you commit to investing everything you’ve saved.
(WAIT! STOP! There’s one more thing to keep in mind before we go on to the final bucket. Don’t move on to this step if you have ANY outstanding credit card debt or high interest loans. Why? Because this whole plan hinges on your dollars earning you money at a conservative, safe pace. But those returns, 5-12%, are always going to be less than a high interest loan or credit card. Meaning you’re more likely to get richer, faster, if you pay off your credit cards first.)
Final Bucket: Investing
Ok, you do all the above? Your financial house should be in order.
But, I have to stop you again: Before you move onto this step, you have to mentally ready yourself for a simple fact: Sometimes stocks go down. A lot.
As long as you’re investing safely and you believe America will exist in 50 years, you should end up totally fine and profit in the long run. You can ignore every drop in the market and remain consistent.
Now, let’s have fun.
There are 2 main vehicles you should be considering:
A traditional brokerage
A self-directed Roth IRA
Each one acts like a brokerage account. Meaning you can buy and sell stocks, funds, bonds, derivatives on copper futures, etc.
There are many other accounts and investment and retirement vehicles out there. I’m going to suggest you ignore them and focus just on the two above.
A Buffet of Financial Products
Why are there so many options and why this is all so confusing?
A retirement account or brokerage account is a product.
There’s not some ethereal “IRA” floating in the liminal bits of U.S. law. These “accounts” exist as a way of luring your money into a financial institution. Banks profit from you storing your money with them. Sometimes with transaction fees (be mindful of this!). When you set up an IRA or brokerage account? Treat it as though you’re buying something.
So don’t get confused by the alphabet soup of IRA, 401k, SEP, 529, HSA, etc.
All the different tax benefits and enticements of these accounts exist for the exact same reason heated seats and tinted windows are offered in new cars.
And just like add-ons for cars: You probably don’t need any of them unless you’re a special case, and you don’t want to be paying for something you won’t use.
Ok, so let’s talk about the two I mentioned above and the pros and cons for each.
Traditional Brokerage: This one is simple and you can set one of these up in less than 10 minutes. Once you transfer cash in, you can then use that cash to buy whatever you want. PRO: If you need the cash in an emergency, you can quickly sell everything and transfer it back to your bank account with no penalties. CON: You will owe taxes on this every year if you’re making money (good problem to have, I guess). WHERE TO SET UP: I suggest either the Robinhood App (easiest to set up and manage) or Fidelity.
Roth IRA: This one you would need to set up with a financial institution that offers it. But basically: This works the same way as a brokerage, with you choosing to transfer money in when you want. Only difference: You can’t touch that money until you’re 60 or older (there’s a loophole to this I’ll explain in a second) and you don’t pay taxes on any gains you make. Which is glorious. PRO: Growth without taxes FTW! CONS: A limit on how much you can transfer in ($6,000 per person in 2022), and a 10% early withdrawal penalty on any gains above your initial contributions. WHERE TO SET UP: I suggest Fidelity, Vanguard, or Schwab.
(NOTE ON THE ROTH IRA: You cannot set one up if you make more than $214,000/year as a couple in 2022.)
Now, based on the amount you have available to invest, you can set up both a traditional brokerage and a Roth IRA (if you’re under the income threshold). Max out the Roth transfer every year and transfer the rest to your brokerage. Easy peasy.
If you want both? Fidelity offers both and you can set up two accounts at the same time.
An advantage of Fidelity that I like? Well, you remember the loophole I mentioned about accessing money in a Roth before you’re 60? Fidelity makes it really easy to take a tax-free LOAN against your Roth IRA. But the interest you pay back on the loan doesn’t go to Fidelity… you’re paying the interest back into your own account. For real! If you have enough in here and you could literally give yourself a low-rate mortgage that you get to profit from. (I’ve already done this twice. It’s glorious.)
So that’s if you set up both.
Now, if you want ultra-simplicity and are ok with Uncle Sam taking a cut of all your hot-nasty gainz? Just go with a simple brokerage.
Honestly, as far as brokerages go, Robinhood gets a bad reputation, but it has one feature I like more than any other brokerage: Recurring investments. Not just recurring transfers (where money goes from your bank account to the brokerage on a regular basis). More like: Money will transfer in from your bank and automatically buy whatever asset you want. It’s pure set-it-and-forget-it.
Say you want to set up a recurring $300 weekly purchase of $SPHD, my favorite starter investment.
You just look it up:
Hit “Trade” and then “Buy.” Then change your order type to “Recurring Investment”:
Select your frequency and where you want this money to pull from:
Then select the amount you want:
Confirm the order and boom! All of it is automated and your money begins making money.
Just setting up Robinhood and a recurring purchase from your $20,000 set aside for investing? It will take you about 15 minutes.
Don’t get overwhelmed: It is seriously that easy and quick.
You can do this in the time it takes to poop.
But regardless of whether you go the Brokerage or the Brokerage+Roth IRA route, once you have the accounts set up and funded, you will have to answer a simple question.
“What Should I Invest In First?”
Here’s something a typical financial advisor won’t say: Your goal right now is NOT to optimize your returns, beat or match the overall market, win a lotto ticket, or even get better returns than inflation.
Your goal is to make sure “the line goes up.” As in: Years from now, you end up with more money than you started with.
This is going to be the case until you have about $25,000 to $100,000 invested.
Simplicity, consistency, and stability should be your first, second, and third goal.
I’m saying this because, once you get the hang of investing, you will be allured and enticed by news and ideas and speculations and promises that THIS or THAT stock is going to EXPLODE!
“I keep hearing people talk about making big money in Gamestop/EV Stocks/Gold/Flying Sex Robots!”
I’m going to stop you there: No. Bad. Don’t. Lalalalalalala. Plug your ears and ignore it.
Once you have at least $25,000 steadily making you money, you can start to think about taking 10% of that ($2,500) and putting it in something a little riskier.
So what should you do until you reach that point?
As little as possible, for starters. (Spend your time thinking about making more income to funnel into your investments.)
But in terms of actual investments?
You won’t go wrong with $DTD. This is a fund (that you can buy like any stock) that contains just about every dividend-paying company in the U.S. (Dividends are income that stocks pay you just for owning them.) This cuts you a check every month, just for owning it.
Want something way more aggressive? I like $TDIV. Same as $DTD, but it only focuses on tech stocks that pay the highest dividends.
Less aggressive? $SPHD. This takes the 50 stocks in the market with a combo of the highest dividend and lowest volatility. (Volatility is how much a stock wiggle wiggles, spikes or dips).
The cool thing about these is: If there’s ever a recession and one of these companies goes bankrupt? The fund sells it for you. You never have to think about getting rid of individual stocks you’re worried about.
Now… what if you want… even more stability?
Well, then you’d buy one of the three investments I listed above. And you’d mix in something like a collection of bonds to smooth out the volatility of your portfolio.
I like $MUB for this, if you’re buying in a regular brokerage. Why? Because it’s a fund of safe municipal bonds. Thus: its monthly dividends are tax free. You get a little bit of cash and you pay no taxes. Love it.
(For that reason, it makes absolutely zero-sense to buy this in a Roth IRA. If you want to do something like this in a Roth, buy $SCHP, which is a collection of safe inflation-protection securities.)
Right now, in my own Robinhood account, I’m buying $10 per day of $TDIV, $10 per day of $DTD, and $1000 per month of $MUB.
Simple. Safe. Easy. I’m beating the overall market this year, and I know over time my portfolio will do fine.
(I also have a Traditional IRA/401(k) that I buy individual stocks in, a Roth IRA I can’t touch because I make too much that has a lot of $QTEC, and a SEP IRA I just set up.)
[Quick Note: Make sure, wherever you set up and with whatever you buy, set up “Dividend Reinvestment.” Usually this requires 2 or 3 button clicks. This will take any income you get from what you own and just buy more of the thing that paid the dividend.]
How much should I invest in each thing if I just have a brokerage account?
Sliding scale.
If you want to do $300 per week, you’d probably be fine doing $200 in a stock ETF (like $SPHD) and $100 in a bond ETF (like $MUB).
That’s a 66%/33% split. Your money will, in all likelihood, do fine.
More aggressive? Do 80%/20%. Less aggressive? Do 60%/40%.
If you don’t want to mess around or do anything finicky — you just want to throw all $20,000 at once and be done with it…
I’d suggest the same ratios.
For 66%/33%, that’d be $13,200 into $SPHD. $6,800 into $MUB.
How much should I invest in each thing if I have both a brokerage and a Roth IRA?
Put the $6,000 into the Roth and $14,000 into the brokerage.
From there, I suggest being the MOST aggressive in the Roth, since you get the biggest tax benefit if you do end up making more money.
This can be as simple as putting everything into $TDIV or $QTEC.
Then, in your brokerage, you have $14,000 to play with.
I’d suggest, across both accounts, keeping the same ratio. 66%/33%. But the be a little more conservative in the brokerage.
That means, if you buy $6,000 of $QTEC every year in your Roth IRA…
You should put $7,200 into $SPHD and $6,800 into $MUB in your brokerage.
With 80%/20%? That’d be the same $6,000 in $QTEC in your Roth…
And it’d be $10,000 in $SPHD and $4,000 in $MUB in your brokerage.
Then, whenever you get more money, just transfer and allocate accordingly.
[NOTE: Not all Roth IRAs are self-directed. Meaning you have to choose a mutual fund to invest in consistently. If you use Vanguard, choose VTSAX. If you use Fidelity, choose FZROX. Don’t even consider any others.]
“Oh, That’s All?”
Look, I just wrote you a lot of words about this stuff, but it’s all quite simple when you break it down…
Get your financial house in order (and clear your credit card debt!)
Set up a Roth IRA, Self-directed Brokerage, or both.
Fund your new accounts.
Buy your preferred investments at the ratio you desire.
Leave what you buy the HECK ALONE.
Write me in 20 years and thank me for helping you get dummy rich.
