Saturday, April 30, 2011

Have $20,000? What to do With it

A friend asked me today, "I have $20,000, what should I do with it?  How do I invest it?  Should I buy a CD with it?  Should I save it in a liquid savings account toward a future down payment that may or may not come and don't know what time frame I'm looking at?  Should I put it into a Roth IRA? What should I do with the $20K burning a hole in my pocket?

The answer is, that all depends on your personal goals, needs and future plans - the reality is, it's important to try to have some kind of insight into one's personal time frame for different life events.  Of course all that can change after a few too many cocktails at the bar, and you or your company for the evening decide to head to the airport for a shotgun wedding in Vegas.  Fantasy aside, most people can really predict and steer events and have a decent amount of control over what life events happen when - at least for items such as buying a new home or car or going to grad school, etc.

In my friend's situation who posed the above question, likely the best bet, since they don't have really anything aside that $20,000 in savings, is it should be placed into a CD of a one year duration.  I'd be certain that it's in a CD that can be withdrawn at any time if need be, with a relatively low penalty for withdrawing the funds early - i.e. lose one month's interest if withdrawn early.  That way if an opportunity arises and the funds are needed, it's not that big a deal to withdraw the funds.

Investing in a Roth IRA is also a good bet; here's a good article that explains the penalties for withdrawing before age 59 1/2:  It's also a good way to store your money until you're ready to buy a home, though potentially more risky if you invest in stocks and the stocks go down when you're needing to tap into the funds.  This is the route that I'd most likely personally take, in part because I'm a high risk taker and am comfortable taking higher risks than most.

The safest plain vanilla approach is to simply keep it in the bank and do nothing with the money.  I really don't see the benefits of doing nothing, for no one gets anywhere in life sticking with the status quo in general.

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