Vault’s Viewpoint
- Investing early and often can help you achieve your financial goals sooner.
- Investors make better decisions when they know which assets align with their goals and risk tolerance.
- Have your money work for you by diversifying into multiple assets.
Best Ways to Invest $25K
When thinking about how to invest $25,000, you can choose from many assets based on your risk tolerance, goals and other factors. This guide will cover some of the best ways to invest $25,000 to grow your wealth over time.
Buy Stocks
Thousands of corporations offer their shares on the stock market. Accumulating shares in a company gives you financial exposure to that company’s performance. If a company grows its revenue and earnings each year, its stock should gain value.
Investors can use several filters to find optimal stocks for their portfolios. They can look for stocks with high dividend yields, impressive financial growth, reasonable valuations and other factors. Some stocks will have multiple good characteristics.
Researching stocks and finding good picks can help you outperform the market. However, it is important to diversify your portfolio instead of putting all of your eggs in one basket.
Buy an Index Fund
If you’re new to investing, you may want to start with an index fund that follows a popular benchmark like the S&P 500 or the Nasdaq 100. These funds give you instant portfolio diversification. Some of these funds have hundreds of different stocks that cover multiple sectors.
When you buy any fund or ETF, it is a good idea to check the fund’s positions, historical performance, and expense ratio. The fund’s top 10 holdings show where most of your money will go. Investors should feel comfortable with a fund’s top 10 investments before buying shares.
A fund’s historical performance will indicate if the fund is consistent or if it has choppy returns. The stock market endures volatility and requires a long-term approach. However, some investors have lower risk tolerances and may not want funds that have dramatic price swings.
Finally, the expense ratio represents how much you pay for putting your money in the fund. A higher expense ratio reduces your total returns, and you pay the expense ratio on the value of your investment. Even if the fund loses money, you still have to pay the expense ratio. Luckily, many quality index funds, mutual funds and ETFs have expense ratios under 0.20%.
Invest in Bonds
Bonds are for investors who want stable cash flow with less risk. The U.S. Government’s Treasury bills are considered risk-free as long as you hold onto them until maturity. Corporations also offer bonds, which come with higher interest rates. While corporate default is a risk for these bonds, it’s possible to buy corporate bonds from reliable firms like Apple and Microsoft.
Bonds are highly sensitive to interest rate fluctuations. When interest rates increase, existing bonds lose value because newly issued bonds will offer better rates. Bonds will gain value if interest rates decrease since future bonds will have lower yields. You will receive all of a bond’s payments if you hold it until maturity.
Open a High-Yield Savings Account or a CD
High-yield savings accounts and CDs are risk-free accounts offered by financial institutions. These accounts let you accumulate interest just by having your money sit in an account. Banks use high rates to encourage people to keep their money in the financial system.
A high-yield savings account is usually limited to six withdrawals per month. Any excess withdrawals will include small fees. Certificates of deposit do not let you take out money until the maturity date without incurring a fee, although some no-fee CDs are available.
You can choose whether to reinvest interest in your CD or if you want those payments to arrive in your checking account. Banks will offer several maturity dates and let you choose. High-yield savings accounts have variable interest rates, which can fluctuate. However, CDs have fixed rates for the length of their terms.
These accounts are insured by the FDIC. Your bank probably offers them, but you can find the best CD rates if you see what online banks are offering. These banks have less overhead, which allows them to set higher rates for their savings accounts and CDs.
Contribute to a Retirement Account
In most cases, you’ll have to wait until you turn 59 ½ to access money from a retirement account. However, these accounts have tax advantages that allow you to save money and grow your wealth sooner.
The two most popular accounts are traditional and Roth retirement accounts. Traditional retirement accounts let you make pre-tax contributions. You’ll only pay taxes when you withdraw from your account. At that point, you will likely be in a lower income tax bracket.
Roth retirement accounts don’t lower your current tax bill. However, the withdrawals are all tax-free. You won’t even owe taxes on capital gains or dividend distributions within your Roth account.
Anyone can create an individual retirement account, but you should start with your employer’s matching program. Match programs offer free money as long as you contribute. Employers will match a percentage of each contribution up to a designated limit. The IRS adjusts annual contribution limits for retirement accounts each year.
Real Estate
With $25,000, you might have enough to buy real estate, depending on where you live. When you buy a house, you will escape the cycle of paying rent and can finally build equity with your monthly payments.
Conventional mortgages only require a 3% down payment if you have good credit. If your credit score is as low as 500, you can qualify for an FHA loan if you make a 10% down payment.
If you use $25,000 for a 3% down payment, you can buy a property valued at approximately $834,000. Real estate investors using $25,000 as a 10% down payment can acquire a $250,000 property.
Real estate is less liquid than the other choices discussed so far. However, you can choose to live in the property and pay off the mortgage or rent it out for extra income. You can also live in the property while listing it on Airbnb for extra cash.
Using $25,000 as a down payment for real estate may be unrealistic for areas with higher costs of living. Aspiring investors who live away from coastal cities and in rural areas will have more affordable choices.
Pay Off Your Credit Card Debt
When you put your money in a stock, bond or another asset, it has the potential to grow. Compounded returns are a great thing, but any debt on your credit card will also compound. Saving money will increase your wealth, especially when it comes to paying off credit card debt.
It’s normal to find credit card issuers with APRs above 20%, and creditors will raise their rates if you have a bad credit score. Your stock or index fund would have to generate a 20% return each year just to keep up with credit card interest growth. It’s unrealistic to expect a stock portfolio or a fund to generate a 20% return every year. However, your credit card debt is guaranteed to grow by a high amount each year if you don’t touch it.
The average credit card debt balance per American currently stands at $6,360. Getting your debt in order will reduce your overhead and allow you to put more money into assets in the future. It makes more sense to prioritize high-interest debt over investing.
Start a Business
A business can create an additional income stream and possibly replace your full-time job. Businesses offer a higher income ceiling and can align with your skills and hobbies.
Many startups require some capital to get started. If you want to start a lawn care company, you will have to buy a lawnmower and other equipment. You can save money with a digital business since there’s less overhead. However, you will still need a website, logo, and other assets that cost money to get started.
The return on investment depends on your ability to offer a great product or service and attract customers. A business will result in extra work, and it’s not passive, like buying a stock or a bond. The advantage of starting a business is that you get full control over how it operates. You can make real-time decisions and capitalize on opportunities. Business owners can also put in sweat equity to gain market share at a faster rate.
Frequently Asked Questions
Where Should I Put $25,000 to Get the Most Growth Value?
Stocks, bonds, high-yield savings accounts and retirement accounts are various choices to consider. You should determine your financial goals and risk tolerance first. This clarity will help to guide your investments.
What Will $25,000 Be Worth in 20 Years?
Money loses purchasing power each year it stays in the bank and doesn’t collect enough interest to keep up with inflation. However, you can get a lot of mileage out of $25,000 over 20 years if you invest it. An investor who achieves an 8% annualized return will turn $25,000 into $116,523.93 in 20 years.
Is it good to have $25,000 in the Bank?
It’s better to have some money in the bank than none at all. Most people can get through several months of living expenses with $25,000 if not an entire year. The mileage you’ll get out of $25,000 in the bank depends on where you live, your lifestyle and other factors.
