6 smart ways to turn $20,000 into steady passive income

how to invest 20k for passive income

how to invest 20k for passive income

If you’re looking to receive passive income with your investments, there are many ways to do so. While your best choice will depend on a few factors, like your age and risk tolerance, there are many ways to invest $20,000. The right investment options for you will depend on what your long-term goals are. You can also work with a financial advisor to help you choose your investment options.

Invest in a retirement account

Investing in a retirement account is often one of the best options, especially if you haven’t invested much yet. Retirement accounts, like a 401(k) or individual retirement account (IRA), have tax advantages as an incentive to put your money into them. This means you can keep more money.

How you prioritize different retirement accounts depends on your situation. Some employers will match your contributions, so it makes sense to at least invest up to the match. On the other hand, IRAs tend to give you more control over your investments. Your situation and investment goals will determine how you should prioritize different retirement accounts. However, these accounts can provide you with great passive income down the road.

Pay off the debt

You may not consider paying down debt as an investment, but it can be a great move. If you are in a lot of debt and receive $20,000 in one lump sum, clearing your debt may provide the best return. For example, you may have a lot of credit card debt with 15-20% APR. Unfortunately, even the most shrewd of investors cannot achieve such high returns, at least not consistently. Paying off your debt can put you on the right track; not only will it put you in a better position today, but it means you’ll have less interest to pay in the future.

Open a high-yield savings account

how to invest 20k for passive income

how to invest 20k for passive income

If you don’t already have an emergency fund, this is the perfect opportunity to change it. You can use a high-yield savings account to earn passive income on the money in your emergency fund. Of course, having an emergency fund will help make sure you have cash when the unexpected happens. But having cash on hand has the added benefit of allowing you to avoid high-interest debt when these things happen. For example, you can avoid loading large charges on a credit card, thereby racking up more of that debt we discussed earlier.

Invest using a brokerage account

Brokerage accounts are investment accounts that you open with a broker, such as an online broker. These brokers often have minimal commissions. They can also offer even more freedom than an IRA as they have no penalties for early withdrawal. But they also lack the tax benefits of IRAs, so brokerage accounts tend to be best for investing money you’ll need before age 59½. However, having diversity in your tax strategy can be beneficial. You can withdraw money slowly as your investments grow, providing you with a passive income.

Invest in dividend stocks

If you specifically want passive income, you might want to consider dividend stocks. Dividend stocks often pay out quarterly, usually with a yield of between 2% and 5%. Dividend-paying stocks tend to be well-known and financially stable companies, so the risk is generally low compared to other stocks. However, you may find a similar (or better) rate with a high-yield savings account when interest rates are high.

Invest in real estate

Real estate is one of the oldest forms of investment and can still deliver strong returns today. It can also be a great source of passive income. You can’t buy many houses for $20,000, but that doesn’t mean you can’t invest in real estate. There are many ways to buy real estate shares today. For example, you can invest in a real estate ETF, a real estate investment trust (REIT), or you can try real estate crowdfunding. You can start with $1 or maybe even less in some cases. If real estate is your investment of choice, $20,000 can go a long way in today’s economy.

The bottom line

how to invest 20k for passive income

how to invest 20k for passive income

In general, creating significant passive income takes a lot of time, a lot of money, or both. $20,000 won’t create enough passive income to support you, but it can give you a great head start. You might choose to pay off debt, open a high-yield savings account, or start investing. No best strategy works for everyone; getting started is very important. That way, you start earning passive income with your $20,000 as soon as possible.

Tips for investing

  • Financial advisors help investors analyze various investment options and can help create a plan of action to achieve their goals. Before investing in any passive income investment, consider speaking with an advisor to understand how it fits into your portfolio. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you are ready to find an advisor who can help you achieve your financial goalsit starts now.

  • When investing your money, it’s important to diversify your assets among many different types of stocks and bonds. This helps you gain exposure to more market sectors and benefit from their growth. Our asset allocation calculator helps you select a profile that’s right for you based on your answers to simple questions.

Photo credit: ©iStock.com/Zolak, ©iStock.com/fizkes, ©iStock.com/MARHARYTA MARKO

The post How to Invest $20,000 for Passive Income first appeared on the SmartAsset Blog.

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