Someone who has saved up $50,000 usually wants to put it to work with the goal of seeing it grow. There are any number of ways to do that through investing.
One critical question before getting started is whether the money is free and clear, or will other obligations chip away at it? To make that determination, investors might want to do a little financial housekeeping. The following can help someone figure out how to invest that money—or whether they really have as much as they thought to invest.
What to keep in mind before investing
Here are some questions to consider asking before investing $50,000.
1. Is your emergency fund solid?
Financial advisors have long recommended that consumers keep a cushion equal to about three to six months of income on hand in an emergency fund, in case of unexpected expenses or circumstances. The consequences of not saving were thrown into stark relief at the height of the Covid pandemic, with a quarter of Americans saying they lacked an emergency fund. More than half of Americans had less than three months’ worth of emergency funds, the survey found.
A high-yield bank savings account is one place to put these emergency funds (though they don’t pay much more than 0.5% as of early 2022) because that cash can easily be accessed. A money market mutual fund is another option that’s low risk and liquid.
2. Do you have debt to pay off?
Carrying some debt, such as lower-rate home mortgages or auto loans, can help build credit scores as long as your credit utilization stays low and you make payments on time. Credit-rating companies such as TransUnion and Experian consider credit utilization when calculating a credit score. Credit utilization rate is total debt divided by total available credit, and generally, credit bureaus recommend keeping credit utilization rate below 30%. A good credit score is crucial for borrowing money—because a low score will mean paying higher interest rates, or making it hard or even impossible to get a loan.
Most experts recommend paying off high-interest debt and credit-card debt before investing because these interest expenses can eat all the profits earned on an investment. “You want to earn interest, not pay interest,” says Titan retirement analyst Eddie Lopez.
Those in retirement especially may want to carefully examine their debt before investing—especially mortgage debt—to avoid high monthly payments that would be onerous on a fixed income. But investing before paying off debt can make sense if the investments earn more than the cost of interest on the debt.
3. What is your risk tolerance?
Risk tolerance, or an investor’s willingness or ability to absorb a loss on an investment, is highly personal. Determining one’s risk tolerance is key to creating a suitable mix of investments. Risk tolerance is generally categorized as:
- Aggressive: Willing to take on volatility for the possibility of a high return
- Moderate: Seeks balance between stocks and income-generating bonds
- Conservative: Puts money in low-risk vehicles like certificates of deposit
An investor’s life goals, time horizon, life stage, and portfolio size influence risk tolerance.
4. What is your time horizon?
In general, investors with longer time horizons can take more risks. Here are some examples of time horizons and how investors might plan for them:
- Short: This is usually five years or less. These investors expect to need access to a large sum of cash in the near future for the down payment on a house, a new car or other large purchase—or they’re nearing retirement. Investments that can easily be converted into cash include CDs, savings accounts, short-term bonds, and money market accounts.
- Medium: Investors generally make medium-term investments with the idea that they’ll need their money within 10 years. This might include planning for a college education or buying a first home. The American Association of Individual Investors’ asset allocation models for those with 10 years to invest are balanced 50-50 between stocks and bonds.
- Long: These are investments that might be held for 10 years or more, often to meet retirement goals. Long-term investors might be willing to take morerisk early on and lower it over time. Some investors look to anchor their portfolios with index funds, which track the broader market and historically provide a dependable return over time.
5. What are your goals for these funds?
Investors often have both short- and long-term goals, and this time horizon—the period they expect to hold an investment until they need to spend it—can help determine their investment strategy.
Many investors are also now interested in driving positive impact with their investments, and want to build portfolios based on ESG (environmental, social, and governance) criteria. Many asset management companies now offer mutual funds and exchange-traded funds (ETFs) specifically designed to meet this demand, omitting companies in the tobacco, alcohol, arms, mining and fossil-fuel industries.
6. Do you want to be active or passive?
Some investors prefer to actively manage their investments, while some would rather turn that job over to an advisor. Determining your investor type can also help guide your investment strategy for investing $50,000.
Active investors want control over where their money goes. They can use an online broker or trading platform, or a traditional in-person broker to make their investment choices. Some active investors trade frequently with the goal of beating average index returns. This strategy has become more and more accessible, with online brokerage accounts, cheap or even free trading and smartphone apps. Investors can pick their own securities—stocks, bonds, mutual funds, and ETFs.
Passive investors don’t have the time or the inclination to actively maintain their investment portfolios have several options.
- Robo-advisors. A robo-advisor is a digital tool that automates portfolio management. Investors fill out a questionnaire on their financial goals, and an algorithm invests based on those goals. Robo-advisors tend to cost less than a human investment advisor—about 0.25% or less annually of the assets in the investment account, compared with about 1% an in-person financial advisor.
- Investment advisors. Advisors will actively manage your portfolio, and can give you personalized attention and investing education. Hiring an advisor is good for those with complicated finances, or who have very specific goals, such as buying a vacation home, sending a child to an expensive private university, or retiring early.
- Broad market tracking index funds. Index funds are simply investment products that track various subsets of the stock market. The most popular are the S&P 500, the Dow Jones, and the Nasdaq 100. Investing in these doesn’t require much hand holding, since they essentially parallel the behavior of the index.
Other investment assets
Stocks, bonds, and funds aren’t the only game in town. There are some other ways to invest a $50,000 nest egg, including:
- Cryptocurrency. Most crypto is traded by active investors, although managed crypto funds for passive investors now exist. The crypto market is volatile and its performance isn’t necessarily tied to the regular markets. Crypto traders are often real students of digital currency since each has its own structure and rules. Investors can buy crypto through managed accounts, brokerage accounts, or through crypto exchanges.
- Real estate. The recent boom in real estate amid record-low interest rates, has made investing in real estate attractive to many people. In urban markets, $50,000 might not be enough for a down payment, and not every investor wants to spend the time and money to manage an income property. Real estate funds can give investors access to the market without the responsibilities of a physical property. For instance, a real estate investment trust (REIT), is a publicly traded company that’s required to pay 90% of its taxable income each year as dividends.
- Retirement. An employer-sponsored 401(k) plan is one way to maximize your funds before you begin investing additional money. Many companies offer matching contributions for every dollar an employee contributes to these tax-advantaged accounts, up to a point; this is essentially free money. Investors can supplement their company-sponsored retirement plans by opening a traditional IRA or Roth IRA. Like 401(k) plans, IRAs are tax advantaged. Each of these plans has some rules and restrictions, which investors should understand before they buy in.
- College investments. One place people might consider putting funds is in a qualified tuition plan, such as a 529 savings plan, which allows your money to grow without paying federal income tax and is not taxed when the money is withdrawn. There are no income limits, although there are limits on yearly contributions ($15,000 or more annually requires paying a gift tax on the contribution).
The bottom line
There are many ways to invest $50,000. The trick to making the smartest investment for you is in the planning. Diversifying your investments, ensuring that outstanding debt doesn’t eat away at your returns, and planning for your specific financial goals will go a long way toward maximizing every dollar.