If you’ve been building your savings to start investing and you’ve managed to put aside $30K, you may be wondering what your next step should be. How do I invest 30k? What is the best, low maintenance approach?
Here are some great ways to apply that 30K towards growing your wealth.
Pay Off Debt
First and foremost, use some of the money to pay off any debt you may have. It will save you money in the long-run. If you’re carrying a $10K credit card balance with a 15% interest fee, you’ll be paying an extra $1500/year in interest. That’s money that can be better spent on investments down the road. If you want to invest 30k, first start by getting rid of debt.
Emergency Fund
If you don’t already have one, put some of your money aside in an emergency fund so you know you’ll be able to manage if something unexpected happens. You should have 3-6 months’ worth of expenses put aside in an easily accessible account like a savings account. Just make sure it’s not linked to your debit card so you can’t spend it. The period of time you need to cover varies based on how long you think it would take you to find another job should something happen to your current job.
Earning return
What’s next has all to do with three things: risk tolerance, time horizon, and investment objectives. As a matter of fact, that’s how all of your investment decisions are made.
There are several different vehicles you can utilize, so what I’m going to do is give each vehicle its own section, explain what it is, and then give a little more detail as to when it could be used.
Certificate of Deposit (CD)
A bank product with a specified interest rate and a specified maturity. CDs are used to hold money for a specified period of time in a virtually risk-free fashion. More about CDs.
You’ll choose a CD for two reasons. The first is if you want a safe, federally insured vehicle to stash away some cash. The other reason is if you do not want to touch that money for a specified period. For example, you’re going to buy a house in three years and you don’t want to jeopardize that down payment. You buy/invest in a 3 year CD. At the end of year three, you’ll get back your principal (what you put in) and some accrued interest. Early withdrawal penalties apply.
Savings/Money Market Accounts
Typically used for your emergency fund. Easily accessible, and able to earn a little interest.
That’s pretty much it when it comes to these accounts. The interest they offer will be (not always) pretty low, but, like the CD, it offers a very safe place to store your cash until you need it. Unlike the CD, however, there are no early withdrawal penalties.
Qualified accounts
Basically any retirement account. Traditional IRA, Roth IRA, and employer-sponsored plans (401k, Simple IRA, etc.). There are contribution limits associated with these accounts.
With these accounts, as I said, contribution limits are something to pay attention to. With your Traditional and Roth IRA, there’s a $6,000 contribution limit ($7,000 if you’re 50 and older). 401ks have a limit of $19,500 (25,500 for 50 and older). Simple IRA limit is $13,500 ($16,500 for 50 and older).
This is a long term investment solution, as early withdrawal penalties apply. There are several ways to “exempt” yourself from that penalty, however, such as a first home purchase. For an extensive list of these exemptions, click here.
These accounts are also called “tax-advantaged” accounts because, as the name suggests, there are tax advantages. You either lower your taxable income with your contributions or have the ability to withdraw the funds “tax-free” (barring an early withdrawal penalty, of course).
Non-Qualified Accounts
Brokerage accounts or any investment vehicle that doesn’t have any tax benefits. Meaning, you pay taxes on any capital gains and dividends you receive. No contribution limits.
Honestly, the only advantage to these accounts is there is no contribution limit. For example, if you’ve maxed your contribution for your employer-sponsored plan and your IRA, then you can dump the rest of your money here.
Health Savings Account (HSA)
Accounts specifically designed to help you with your medical expenses. Money that you contribute to this account is “tax-free” or “tax-deductible”, which means it lowers your taxable income. Also, the funds, if used for qualified medical expenses, are tax-free.
With some, not all HSAs, you can invest what you’ve contributed. So if you have 30k to invest, I’ll point you to the below section to help with that. There are contribution limits with the HSA, however, so keep that in mind.
Asset allocation
After you’ve selected an investment vehicle (this section does not apply to CDs, savings accounts, or money market accounts), it’s time to invest your capital.
Asset allocation is my preferred method to invest, and I’ve written extensively on it here. So if you want to invest 30k, here’s what you need to ask yourself. How long until I need these funds? What is my ultimate goal for these funds? What am I willing to lose?
If your time period is less than 5 years, ignore this section and stick your money in a savings account or a CD. The risk/reward is unfavorable in this scenario.
If you have, ideally, 10+ years, then you have some options. The next question is about risk tolerance. What kind of portfolio are you comfortable with? Using the stocks/bonds/cash breakdown, are you a 60/40/0 type of person? Maybe you’re quite tolerant and prefer an 80/20/0 approach.
For those of you that are not tolerant of risk and/or you have a shorter number of years until you need to access these funds. Your portfolio should start at 50/50/0, and then adjust as you see fit. The cash portion in this breakdown should be used as investable cash for when you see a buying opportunity and/or funds you’ll need access to in the near future (unriskable capital).
Risk Tolerance
If you really want to know what your unique risk tolerance is, take our quiz!
I know I didn’t really give a concrete answer to what’s posed in the headline, but that’s the thing about investing – it’s incredibly personal. You need to do what’s best for you.
If time is on your side, max your retirement contribution, then put the rest in a savings account until next year. At that time, max it again.
If time isn’t your friend, a CD isn’t a bad idea. As I said earlier, paying down/off debt is incredibly worth it. That’s an automatic 15% return on your money if you pay off your credit card. Money that can be used more effectively going forward.
Read our articles, ask for advice, and do what’s best for you. That’ll help you answer the question: how do you invest 30k?
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