How To Invest $20,000?

By | June 12, 2017

In about a month or two, I will receive $20,000.  The problem is, I’m not sure how to invest $20,000. It may seem like $20,000 is a lot of money, but in actuality, it isn’t. Part of me wants to invest the full $20k but I’m not sure that’s the best thing to do. There are all these competing interests. I definitely don’t want to waste this opportunity.  I won’t have another windfall like this for another couple of years. In any case, before I delve into what my plans are, let me give you a snap shot of my financial situation.

Debts

I have two student loans.  The first student loan has a remaining balance of $2700 at a fixed interest rate of 5.2%. I was hoping to bring this debt down to zero with my regular income, but ran into difficulty. First, I had unexpected damages on a rental car and had to take care of it with my credit card. Then, I went on vacation without proper planning and spent way too much money.  So, I don’t really have the money to pay this down.  I really wanted to get rid of it by next month, and I still might make a significant dent into this with my next pay check, but it won’t be zero.

The other student loan I have has a balance of about $21,700 at an interest rate of 2.625%.  The monthly payment is $97 and will rise to $129 in 2018. It will remain at $129 for the remainder of the loan, which, at minimum payments, will take me another 25 years or so to pay off. But, that’s it for all of my student loans. I’ve been paying on these loans for a while now, and would like to get rid of them, but also want to make the best financial decision I can.

In addition to the student loans, I have credit card debt. It was zero for the longest. But, because of my overspending, I’m back to using my credit card again.  It’s funny, but when my balance is zero, I don’t want to use the credit card, but as soon as the balance is high enough, I rationalize its constant use. Just last night, I took a cab to the bar, bought drinks, and took a cab back home and put it all on my credit card. I can’t wait to bring the balance down to zero again.  Current balance is about $1600.  And it’s moving in the wrong direction.

That’s it for debts. I do have a mortgage, but I’m excluding that for now. Although I plan on renting out my house, I have no intention of using any portion of this $20k to set aside for vacancies, emergency repairs or anything like that. Let’s just say that I’m comfortable where I am with the real estate side of my financial life.

How To Invest $20000?

So here is my current plan. I will set aside $5000 in a bank account for taxes. My tax rate is about 25%. And, it might even be higher than that since I now have to add $20000 to my income for the year. But, I don’t want to have a huge tax bill next year that I can’t pay for. So, I’ll keep $5000 in some account that I won’t touch until I’m ready to do my taxes. If I actually have money left over from that $5000 next year, I’ll invest it.

So, with $5000 set aside, that leaves me with $15000 to invest. But, before I invest any of that, I’m going to payoff my student loan that has a balance of $2700. I will then payoff my credit card that has a balance of $1600. That will leave me with $10700.

My emergency funds are a bit lacking because I had to dip into them recently. I know it’s kind of silly, but I have 2 accounts for my emergency funds: Digit and Qapital. One is a back up to the other. I try to take money from one account if I need it before going to the second. I’m thinking about having a third back up, which will be Capital One 360. Actually, Capital One 360 was always a backup, but I have about $4 in that account right now. Just never had the means to replenish it.

So, if I take $1700 and disperse it amongst all three accounts, I’ll have $3000 in emergency funds, with each account having $1000 balance. I could put all $3000 into one account, but I rather them separated. $3000 might be too much of an emergency fund for me, but that’s a topic for another day. Anyway, once I take the $1700 to replenish my emergency funds, that will leave me with a whopping $9000 to invest.

Peer-To-Peer Lending

I’ve been giving a lot of thought to trying out peer-to-peer lending. Lending Club and Prosper are the two biggest ones. However, since Prosper is not a partner with Turbo Tax, I would start out with Lending Club. Because I’m just getting started, I’m thinking about moving $1000 to Lending Club to give it a try. It would probably have been best to start off with $2500, but that’s a huge amount out of the $9000 to devote to Lending Club. I don’t want to say the $1000 is play money, but I can always increase my contributions if I think it’s worth it. If it doesn’t work for me, then I can pull my money out and even if it’s a loss, $1000 is not an overwhelming amount of money to lose.

Stock Options

Stock options is something I’ve always wanted to get into. The strategy that I’m most interested in is the covered call strategy. I think it’s conservative and a good starting point for a beginner. However, I think investing in stock options is a little bit more involved than I have the time for right now, so I don’t think I’ll be investing in that strategy at all this year.  I’ll think about this for next year.

Dividend Portfolio

With the remaining $8000, my plan is to dump it into my Dividend Portfolio. Because I invest using the Sharebuilder plan with Capital One Investing, I get to invest 12 times in stocks, indexes, ETFs, mutual funds, etc. for $12 a month. Because I have a total of 7 stocks with Capital One Investing, I have to log in twice a month and change which stocks I invest in, to get the full benefits of investing 12 times. It’s ok if you don’t understand what I’m talking about, but sufficed to say, it’s very annoying. Had I only had 6 stocks, well, I could set up the automatic investing to invest twice a month in the 6 stocks. That would equate to 12 times/trades. But I have 7 stocks, and not 6. So I have to manually set the amounts each month to utilize my trade credits.

I say all that because my plan is to increase the number of stocks I own from 7 to 12. That way, I can set the automatic feature to invest once per month which would equate to 12 trades because I would own 12 stocks. So, my plan is to find 5 more stocks, add them to my dividend portfolio. Then I would use the $8000 to fund the investment of those 5 stocks as well as the contributions to the remaining 7 stocks in my dividend portfolio.

Conclusion

What do you think about my plan? If it helps, I’m already maxing out my 401k at work and my IRA. Given all the above, what would you do differently? I’m really looking forward to your comments.

12 thoughts on “How To Invest $20,000?

  1. Scott

    Sounds like you’ve got a good plan figured out. Priority #1 for me would be to pay off the credit card debt. It is hard to find safe investments that would equal to what you’re paying in credit card interest. Second would be to pay off the higher interest rate student loan. The 2.625% one I might let ride since I could easily invest that money elsewhere and make more in dividends than the interest payments.

    Setting aside some for taxes is probably (but unfortunately) important too. I’d then probably throw the rest into stocks. If you wanted to get into options, you could use some of it as collateral for selling put options (exact same risk profile as selling covered calls). You basically pick a price that you’d want to own a stock at and get paid a premium to buy it at that price if the stock drops.
    Scott recently posted…May 2017 IncomeMy Profile

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    1. Dividend Portfolio Post author

      Yea, pretty much what I was thinking Scott. I may still lay off the stock options for now. I wanted to build my portfolio to a respectable sum first. Awesome comment.

      Reply
  2. pia

    If I were you, I’d do the same. Pay off the student loan with the lower amount and the credit card. I might even opt to pay out the other student loan as much as possible as personally I would prefer to not have any debt at all. Either way, it will be interesting to see what you ultimately end up doing!

    Reply
    1. Dividend Portfolio Post author

      Thanks. I will definitely post what I decided to do. I also have to make an edit to the post as some things have changed since I posted the article. Specifically, I’ve paid down my student loan to $1000, and so that frees up $1700 which I might add to the $1000 to lending club. I didn’t realize that a minimum of $2500 was necessary to do the automatic investing option, which i was interested in.

      Reply
  3. Dividend Daze

    Never got into P2P lending but it doesn’t seem like it would be for me. I am always prone to paying off debt and investing though. Nice that you can already max out your tax benefit accounts. Guess I would have to agree with above and pay down debt if the interest rate is high, if not invest the rest and grow your portfolio. Or you could also do a different option that I can’t believe you overlooked. You could give that cash to your old pal Daze haha. Either way is a win win. Looking forward to seeing what you do.
    Dividend Daze recently posted…Small Savings, Big ImpactMy Profile

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    1. Dividend Portfolio Post author

      Daze, I thought I would give you something far more valuable than cash and that is my sincerest gratitude for your comment!!! I’m very ambivalent about peer-to-peer lending. Based on all the reviews I’ve seen, it seems that most people earn a decent return in the beginning but tend to lose money and the end. It’s also important to note that the money, for the most part, is not liquid and so I would have my money tied up in 3-5 years. That being said, I like the passive nature of Lending Club (I prefer the automatic approach rather than manual). I just realized though that a minimum of $2500 is necessary for me to utilize the automated feature. Still not overwhelming, and if I lost it all, it would suck, but I would still be ok. But I like that I’m diversify my sources of income, to the extent I can make decent choices with my investments.

      I will definitely be sharing with the community what I decide to do with the funds. Right now, I’m leaning towards doing the $2500 in Lending Club. Because I just made a payment to my student loan and brought the balance down to $1000, there’s an extra $1700 that I will have available that I can put on top of the $1000 I was going to use to transfer to lending club. So, my allocations is still roughly the same.

      Reply
  4. Dividend Diplomats

    Sounds like a hypothetical plan. For me, I would focus it all on eliminating some student loan debt and freeing up my monthly cash flow. Unlike a mortgage ,student loans are not cheap and often comes with a high interest rate. So I would do what I can to get that debt out the door.

    I do think I would pass on P2P lending – for now, I would rather build my dividend income and then use the cash to invest in some rock solid dividend companies and really provide some juice to my dividend income. When you find a suitcase with $20k, I cannot WAIT to see what you do with the cash!

    Bert

    Reply
    1. Dividend Portfolio Post author

      Appreciate it Bert, but it’s not a hypothetical. It’s a matter of when and not if. It’s a bonus I’m getting from work. So, I should have this within the next month and a half give or take.

      I’m really iffy on lending club. On the one hand, I like the passive nature of the investment and the fact that it’s something other than dividend stocks. On the other hand, the money is tied up for three-five years and it’s unclear how many defaults I will have.

      As for my student loans, I’m leaning towards paying off the higher interest student loan, and pay the lowest interest student loan over the next 18 months or less with my paycheck, while maintaining the same level of investment in my portfolio.

      But, in any case, once I acquire the 20k, I’ll definitely be posting how I invested it.

      Thanks again for commenting Bert.

      Reply
  5. Stockles

    Interesting “problem”. I would do the same as you. Having debt sucks. At least I don´t like it. For me, investing in the stock market is something I do AFTER I am done with all the other stuff. Even though the dividend from say OHI chould easly beat a student loan rate, I just think it´s easier to focus on getting rid of debt. In our society, people take huge loans on $100 000 or even $500 000 and still think that they have a lot of money. It´s not before you have zero debt that one can claim to be free. Good luck buddy!
    Stockles recently posted…Dividend Income Update May 2017My Profile

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    1. Dividend Portfolio Post author

      Thanks Stockles. I think what I might do is take the $2000 per month I’ve been using to pay the first student loan (highest interest rate, lowest balance) and use it to pay towards the second student loan (lowest interest rate, but highest balance), once my first student loan is paid off. At the time of writing the post, my first student loan balance was $2700. However, I’ve seen made a payment of $1700 and now that balance is $1000. So, that balance will be gone for sure in July! So, because my second student loan has a balance of $20000, I should be able to pay that off in about 12 months if I maintain $2000 a month payment (and giving myself two extra months in case I pay less than $2000 in a month or two because of an emergency or Christmas, etc). If I did that, then that would allow me to maintain the current levels of investments into my dividend portfolio. What I don’t think I will do though is take the 20k I’ll be getting and paying off the student loan all at once.

      If I follow the above approach, that would also mean that by next year this time, give or take a couple of months, I would have an additional $2000 to contribute to my dividend portfolio, but would be completely debt free except for my mortgage.

      Reply
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