Best way to invest $20K?

In My Humble Opinion
21

It’s simple, really. Suppose you have $2000 to invest. You also have a credit card that’s charging an annual interest rate of 20%, and you have $2000 charged on the card. Let’s look at two scenerios:

Scenerio A: You use the $2000 to pay off the credit card bill. Interest earned = 0.

Scenerio B: You invest the $2000 in an account that pays 7% annual interest. 7% of $2000 is $140; you’ve just earned $140 from your investment. Hurrah!

But remember, you’ve got to figure that negative credit card interest into the equation. 20% interest. 20% of $2000 is $400. You’re PAYING the credit card company $400 this year. So your net yearly interest total is +$140 - $400 = -260. Not only did you not earn a penny overall, your investment strategy actually cost you $260!

In fact, if you do the math, you’ll discover that you’d have to invest $5714.29 in that 7% annual interest account just to earn the $400 it’s going to take to offset that $400 credit card interest payment! $5714.29 invested at 7% just to break even at the end of the year - which is exactly what you accomplished in scenerio A simply by taking the $2000 and paying the credit card debt off.

Since essentially no investments pay returns even close to the interest rates that most credit cards charge, it doesn’t make sense to put any money into ANY investment vehicles until AFTER you’ve paid those credit cards off. In my example, paying off the credit card leaves you at least $260 better off at the end of the year - and in the long run, that’s what matters, how much cash you actually have in your pockets, not numbers on a bank sheet. NOT paying -20% interest is the equivalent of receiving a +20% return.

22

Sorry Bib, wasn’t sure on placement.

Good info already, that’s why I asked. I’m one of those guys that knows of the Stock Market, but I don’t have much past a vague idea how it works. CDs, money markets, etc… again, I know of them, but not how I could exploit them- to borrow a phrase- had I the funds to invest.

I’s also heard what Cisco mentioned, the statement that one could simply park $1M in a standard savings account and live off the interest. Of course, one could still live comfortably in many places with the “mere” $30K to $45K- which is more than I make now- from a more normal interest rate.

Okay, it’s looking like unless I’d be willing to risk a stock purchase (which I still don’t precisely know how that sort of thing works) I couldn’t do much better than 4% to possibly as high as 9% per year.

Need or want is irrelevant, sadly, this all presumes I had that sort of coin to invest. The topic arose when I was discussing lottery wins and the like with some friends. We agreed that anything over a million or more was more or less self-sustaining; as above, simple savings account interest would provide more than any of us (my friends and I) make in a year.

The question arose with the smaller amounts. And here, the consensus was fair-but-not-huge amounts, like $8 to $10 grand, basically just got spent on old bills, new TVs or a car, etc. (I’d buy machine tools, but that’s just me. :smiley: )

The “grey” area, we felt, started about $20K. At this point the interest was starting to be fair money, though not enough to live off. And it was enough that investing in stocks and whatnot could actually generate serious coin, if it was available to risk.

Fortunately I don’t have a credit card, so that’s not a problem, I’m already aware of the risks of “day trading” (not directly, but more of an “urban legend” way) and even if I had a hot stock tip, I don’t have the funds to invest.

I am kind of interested in the “paper trading” as asterion mentioned- I’m assuming one pretends to pick a stock, sets an amount purchased and watches it like you owned it? How would I buy a stock assuming I wanted to?

23

Okay, artemis, is saying debt is a losing situation, no debt is NOT a losing situation. Not earning a 20% return is earning a 20% return. (argh)

I think this is some weird way of looking at it only from behind a credit card debt.

I am not in debt, therefore it cannot apply to me.

24

Well, let’s say your time horizon is 3 years. Well, what happens in three years? What are you saving the money for?

Retirement? Open a Roth or Traditional IRA, or use it to boost contributions to a 401(k).

Down payment on a home? Put 3,000 into an IRA. You can get it back out penalty free for a first time home purchase.

College expenses? Go with a Section 529 plan. You’ll avoid federal income taxes on any amount you spend on qualified education purposes.

If you know you’ll need the money in 3 years and not before, I’d put it in a CD or buy some U.S. bonds maturing at that time. That will pretty much guarantee you a modest yield, and you won’t lose any principal.

If you really want it safe, but you might need it before 3 years, put however much you might need in a money market account, and by 3 year treasuries with the rest.

If you really want to be safe, but know you’ll need 5,000 in three years, another 5,000 in four years, another 5,000 in five years, and the rest in six years, 5,000 in 6 years, AND NOT BEFORE, then buy what’s called a treasury ‘bond ladder.’

Which means 5,000 in bonds maturing in 3 years, 5,000 in bonds maturing in 4 years, etc. That will boost your return, and guarantee your principal and interest at the maturity date, at the the expense of slightly more volatility in the meantime.

At the other end of the scale, if you aren’t so concerned about safety and want to be fairly aggressive, you might try splitting your money between stocks and 3 year bonds–maybe a 20/80 split, on the idea that even though stocks are far more volatile in 3 years than bonds, since the two don’t often move in tandem, and with interest rates at an all time low (which bodes poorly for bonds), a 15-20% stake in stocks may serve to boost potential returns without adding risk to the overall portfolio.

(Modern Portfolio Theory holds that if two investments are not well correlated, or negatively correlated, then holding two higher risk investments can be safer than holding one moderately safe investment, while boosting expected returns)

I wouldn’t go much over 20% stocks, though–and someone with a portfolio optimizer program could come up with a more precise asset allocation than I just did.

25

Actually, that’s not QUITE what I’m saying. Here’s an example of the same principle that doesn’t involve consumer debt: deciding whether to invest in a tax exempt money market account or bond fund versus investing in a regular money market account or bond fund. Typically, the regular account will pay about 2% more interest. So only an idiot would invest in the tax-exempt one, right? More interest is better, of course. That’s obvious.

Except that if you earn a very high income (enough to put you into the 32 or 36% tax bracket), you actually end up with MORE money in your pocket at the end of the year when you invest in the “lower-interest” tax-exempt account. That’s because the interest from that account won’t be taxed, while the interest from the regular fund will be - and it will be taxed at your highest marginal rate (32 or 36%). Below the 32% tax bracket, the tax bite isn’t generally high enough to offset the gains from the higher interest rate, and you’re better off investing in the regular account. At about the 32% tax bracket, though, the increase in the tax bite begins to exceed the small gains you receive from that 2% interest difference - so the tax exempt fund actually gives you a better return even though “on paper” it looks like it should yield less.

A big mistake many people make when they’re doing their financial planning is that they look at only positive interest - the amount that single account yields. But they forget other negative things, such as high credit card interest or high tax payments, when they plan their investment strategy. And they can’t do that if they’re going to come out ahead in the long run. What matters in the end is only the overall NET yield.

26

Hickory- as I said, right now the whole thing is sadly only an interesting concept for me. I have neither the money nor the “purpose” for it (well, other than the usual “I’m sure I can find something to buy” use, that is. :smiley: )

This is just one of those situations where I realized I don’t have a friggin’ clue about some of this stuff, so I thought I’d ask.

Artermis- you remind me of another point. Say I have a wealthy Aunt that passes away and leaves me $20K in her will. The executor hands me a check straight out of her normal bank account.

I’d have to pay something like Capital Gains out of this, right? Taxable like any other income? How much would $20K get taxed? Is there any way to avoid or reduce that sort of tax? What if I had a small business (I do) and invested it in tooling and materials?

Would I have to pay that Gains tax right away, or is it covered at the end of the year with one’s normal taxes?

Say I invest it in having a truckload of Cordless Electric Widgets made, sell 'em and make 50% profit. I assume both the inheritance and the profit are taxed like normal income?

27

Unfortunately, Doc Nickel, I don’t know the ins and outs of the capital gains tax rules at all; questions like yours are one reason I’m going to need to hire a personal accountant to handle my own taxes in the future. Keeping up with all the permutations of the tax laws is a full-time job these days!

28

Buy me a silo.

Really, I need a silo.

29

Sure.
No problem.
Now hand over the $20k.

30

handy says, “You eat better on 9% but you sleep better on 4%…”

I asked bank of america their current savings account rates & the clerk looked pretty smug & said .25% (yes, one quarter of a percent). lol