What would you do with an extra $40,000? You might be tempted to put that money toward instant gratification, like a vacation. But for some people, it may be wiser to use that money to invest in their future. In some cases, you may need to pay off your debt first. Or maybe you end up stockpiling a few thousand for a rainy day. But once you have these basic necessities in place, investing some of it can open up some financial opportunities. When deciding how to invest your $40,000, consider consulting a financial advisor.
stock market
When you invest in the stock market, your profit or loss is determined by the performance of the companies and stocks you choose. Because of this, profits can vary widely. The stock market is volatile, so you can make high profits one day and end up losing money the next.
But there are dozens of ways to invest in stocks, and each method works best with different strategies. For example, you might be interested in an index fund that tracks a benchmark index such as the S&P 500. The S&P 500 serves as a benchmark for the entire U.S. stock market. According to Goldman Sachs, the average return was 13.6%, slightly higher than the average return of the U.S. stock market over the past 10 years.
But these days you don't need a stockbroker. There are several online brokerages that offer low management fees, sophisticated tools, and educational resources for both beginners and experienced traders.
bond
Bonds are a type of debt instrument. Essentially, investors act as lenders to entities such as businesses and governments. Investors lend money to the entity in exchange for the value of the bond at maturity and periodic interest payments.
However, there are several types of bonds, including:
Treasury bills are the least risky option and corporate bonds are the most risky option. That's because corporate bonds don't receive support from local, state or federal governments. Therefore, we can also infer that the highest rate of return is likely to come from using corporate bonds. Higher risk means a potentially higher rate of return.
However, bonds are generally less risky than options such as stocks.
If you're ready to be matched with a local advisor who can help you reach your financial goals, Get started now.
mutual funds
Mutual funds receive funds from multiple investors and pool them together to make investments. This investment vehicle holds multiple securities including stocks, bonds, and other sub-asset classes. Even if you have a 401(k), you may already have invested in mutual funds, as they are a popular choice for retirement plans.
Mutual funds provide investors with a simple and inexpensive way to diversify. However, they can be slightly more expensive than index funds. That's because many mutual funds have active fund managers. This manager makes regular trading decisions with the intention of outperforming the market, rather than matching it.
high yield savings account
When most people hear the word “investment,” they think of extreme growth. But not all investments are designed to triple in value. In many cases, you may just want to accumulate a little interest on your funds in a risk-free way.
High-yield savings accounts offer just that. This is a savings account with a higher interest rate than traditional brick-and-mortar banks. You might not make much money, but it's a great way to protect your money for the time being. Therefore, your funds will remain safe until you find the right investment for you.
Alternatively, a high-yield savings account is also a good place to store your emergency fund. You don't have to withdraw all $40,000 to do so. Experts typically recommend an emergency fund equal to about three to six months' worth of expenses.
CD
A CD, or certificate of deposit, is a savings vehicle insured by the Federal Deposit Insurance Corporation (FDIC). There is usually a set period of time, which can range from six months to over a year. If you deposit your money into a CD within a predetermined period of time, you will receive a guaranteed return. But unlike a high-yield savings account, you can't touch it. Early withdrawal penalties usually apply.
CDs are great if you know you'll need a certain amount of money for your future. The most common terms are 1, 3 and 5 years, so avoid this option if you want to grow and spend your funds quickly.of
Some investors ladder the maturities of their CDs. This strategy splits your investment into multiple CDs with different term lengths. This way, you can take advantage of the higher rates of long-term CDs without putting all your money into a CD.
real estate
While $40,000 can be a great return, it probably won't be enough to buy the property outright. However, there are still some ways you can use it to get started with real estate investing. For some people, $40,000 can be a significant portion of their down payment. Alternatively, if you don't want to deal with physical real estate, you can invest in REITs. REITs (Real Estate Investment Trusts) are typically publicly traded, similar to stocks, and include spaces such as office buildings, housing, retail space, mortgages, or a combination thereof. Some of his ETFs and mutual funds also offer a way to invest in REITs.
You can also consider real estate crowdfunding as an alternative to REITs. This allows you to join other investors and invest your cash into shares in a particular property. Therefore, you can receive a portion of the cash flow from letting out the property or from the appreciation when the property is sold.
Exchange Traded Fund (ETF)
Exchange-traded funds (ETFs) are similar to mutual funds in that they track market indexes. However, they are traded like stocks. ETFs have several advantages, especially for beginners. Choosing an ETF that tracks a broad index can give you more diversity than buying individual stocks and potentially minimize your losses.
Many ETFs are index funds, which have a low management expense ratio (MER). This is an annual fee expressed as a percentage of the fund's investment amount and covers various operating costs such as administration, marketing, administration, record-keeping, and shareholder services.
ETFs are effective for long-term investors who want something lower-cost than mutual funds. That's because the stock price is usually lower than the mutual fund's minimum investment requirements.
How to decide the best way to invest $40,000
Investing is not one-size-fits-all. There may be people around you, such as co-workers or neighbors, who can guide you on how to spend your money. But where your man's $40,000 goes should be determined by your specific situation, not the advice of amateur investors. By considering these concepts, you can narrow down the strategy that is best for you.
time horizon
Your timeline is your timeline. How long do you plan to hold your investment? Depending on your answer, you may need to adjust your investment strategy.
Investors with short time horizons should generally consider avoiding high-risk or aggressive investment strategies. Even if your goal is within a few years, it's a good idea to consider options that are less volatile. For example, stocks and shares may experience significant price fluctuations, which can result in losses. A short time horizon does not give you enough time to recover financially if your stock investment goes down.
As a result, it may be wise to choose short-term, low-risk investments.
In contrast, someone who invests $40,000 to grow their retirement fund is likely to do so for a long time. The greater the difference between your current age and your planned retirement age, the longer the period.
long term financial goals
Knowing your goals is the core and starting point of any investment. If you have $40,000, you need to find out what you want to spend it on before you put it anywhere.
For example, do you just want to preserve the value of that fund? You may need to accumulate enough interest to avoid losses due to inflation. That way, you'll have a viable fund that you can use as an emergency fund or to pay for things like utilities and groceries.
Or maybe you have a bigger goal. $40,000 may be the first step toward a down payment on an apartment or home renovation.
Narrowing down your goals this way will help you decide how to invest your money. Bigger goals may require more significant risks and returns.smaller goals
risk tolerance
Risk tolerance is essentially how much loss you can tolerate. No one wants to lose $40,000. But if you can tolerate it without financial consequences, you probably have a very high risk tolerance.
For others, losing that $40,000 could be the difference between being able to make next month's bills or not. In that case, you may need a more conservative or passive investment strategy due to your lower risk tolerance.
Several factors can influence your risk tolerance, including your age, family situation, and job. Seniors may want a lower-risk investment strategy so as not to jeopardize their retirement funds. In contrast, younger people have more time to recover from potential stock market declines and can consider riskier options.
conclusion
Ultimately you need to find a balance. When deciding how to invest $40,000, there are many options with the potential for significant growth. However, to ensure financial security, you may need to compromise on how quickly and by how much you grow your money. Additionally, investment objectives and strategies may change over time. If you need to modify your portfolio, consider consulting a financial advisor. These can help you choose more conservative options as you age, or readjust your asset allocation to accommodate life changes such as children or marriage.
investment tips
-
Every investor is unique. The best strategy depends on who you are as an investor. Consult your financial advisor for guidance. Finding a qualified financial advisor doesn't have to be difficult. SmartAsset's free tool matches you with up to three financial advisors serving your area and allows you to meet with an advisor for free to decide which one is right for you. If you're ready to find an advisor who can help you reach your financial goals, get started today.
-
Most investors need to think about how to prevent losses. A diversified portfolio is one of the most common methods. Finding the right mix of assets to invest in also gives you more earning opportunities. Consider using an asset allocation calculator to find the best investment balance for your $40,000.
Photo credit: ©iStock.com/da-kuk, ©iStock.com/by Muratdeniz, ©iStock.com/PeopleImages
The post How to Invest $40,000: 7 Smart Investments originally appeared on SmartAsset Blog.
