Start with giving yourself a pat on the back. Whether you saved $50,000 by diligently setting aside a portion of your paycheck, or you came into money through an inheritance, you now have a tidy sum to grow. Investing is one of the smartest choices to make when you have money to spare. Of course, with that comes the dilemma of how to invest $50,000.
How to Invest in Tax-Advantaged Accounts
First, let’s make sure you covered your bases. Assuming you’ve set aside emergency savings for unexpected job loss, medical emergencies or other life events, start by evaluating your tax-advantaged investments. Not familiar with the term? Tax-advantaged investments are accounts such as 401(k)s, Roth or traditional IRAs and health savings accounts (HSA). If you have children, add 529 savings plans and custodial IRAs to the roster.
Each account is designated for a specific purpose, which you need to keep in mind. Retirement accounts such as 401(k)s and IRAs have penalties if you try to withdraw funds before reaching 59 1/2. Health savings accounts, which are tax deductible, are for qualified medical expenses. Custodial IRAs and 529 savings plans are usually savings vehicles for your children.
If you haven’t reached the maximum contribution limits for each type of account, consider using a portion of your $50,000. Roth and traditional IRAs have a yearly contribution limit of $5,500. If you’re 50 or older, it’s $6,500. For 401(k)s, the max is $18,000 per year. With these type of accounts, you’re not taxed on earnings each year. Keep in mind you’re not taxed while the money is growing in the account, but your account distributions for traditional IRAs or 401(k)s are taxed as income. This happens once you start withdrawing funds at age 59 ½ or older.
How to Invest in Easily Accessible Accounts
After you put aside money in your tax-advantaged accounts and emergency fund, consider how long you’re willing to part with your money. If you want to earn interest on your chunk of change, but still want it accessible, you might want to think about high-interest savings accounts. This option is by no means going to earn you large gains on your investment. However, it’s a safe way to earn some interest while having the option to withdraw the funds at any time.
Certificates of deposits are another savings vehicle to think about. Just like a savings account, this option won’t earn you an amazing return. Usually, the percentage rates hover in the low single-digits. But, it’s a safe investment. You won’t lose money with FDIC-insured CDs. However, you will lose some access to your money. CD terms range anywhere from months to five or six years. You can’t withdraw before the term’s up without facing a penalty fee.
If you’re willing to take on more risk, you can open a taxable account. Brokerage accounts have the potential to offer you higher returns than savings accounts or CDs, but come with the risk of losing money. You aren’t guaranteed returns, but you can withdraw your money relatively easily. You’ll just have to sell whatever stocks or funds are in the account if you want cash. However, brokerage accounts come with broker fees and trading fees so the monthly cost can add up.
One way to save on fees is through an algorithm-managed investment account. These are commonly known as robo-advisors. Names you may have heard of include Wealthfront and Betterment. Those are two popular choices, but there are dozens of robo-advisors to choose from. Your current bank may have that as an option as well. The advantage of robo-investing is that it comes at a much lower cost. If you invest $50,000 (or less) with a robo-advisor, expect a fee around 0.25% for the service.
Find Financial Help
Even though it’s the age of the internet, you do have the option to discuss your financial goals with a person. If you have no idea what to do with your $50,000, it’s OK. You can always speak with a financial advisor. Advisors are trained to know what options are available for you and your money, and can offer you insights.
While it’s never mandatory to find someone to help manage your money, in some situations it may be the best bet. If you lack the time or desire to fully research your financial options, having an expert in your corner might be ideal.
Take your time deciding how you want to invest your money. It’s better to know all your options before jumping in. While retirement may seem far away if you’re young, remember that maxing out your contributions to tax-advantaged accounts helps future you. It might sound exciting to open a brokerage account, but a long-term financial mindset will save you problems as you get older. Whatever you decide to do, just know that you have options.
Tips for Savvy Investing
- Consider your goals, time horizon and tolerance for risk before you invest your money. All of these factors inform which asset allocation is appropriate for your situation. In general, the longer your time horizon the better, because then your investments can grow over time.
- While you research your options, you could always stash the cash in an interest-yielding savings account. You’ll earn interest while deciding if you want to find a longer term investment. And the best part is you can withdraw the money at any time.
- Don’t hesitate to get an expert’s advice. Financial advisors have the requisite experience and time to devote to researching and selecting the right investments for your portfolio. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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