What is the best way to invest 20k?
Do you have £20,000 to invest? Learn the best ways to make your money grow.
Whether it’s an inheritance, a bonus, a gift or some savings you’ve accumulated, £20k is a substantial nest egg.
But what to do with it?
This guide talks you through options around investment strategies for you to decide what’s best for you depending on your goals and risk tolerance.
Before investing 20k you should define your investment goals, such as growth, passive income, or tax efficiency
Diversify your portfolio across asset classes like cash, bonds, and shares to manage risk effectively
Prioritise clearing high-interest debt and building an emergency fund before making investment decisions
Speak to a financial adviser to assess risk tolerance and create a tailored investment strategy
What are your investment goals for your 20k?
It is incredibly important to take a goal-based investing approach.
A lot depends on your investment objectives and attitude to risk.
You might want to prioritise reducing your debt or paying down your mortgage.
Having an easily available rainy-day fund could be your priority, or perhaps you’re interested in making ethical investments that are in line with your personal values, in businesses that benefit the environment, sustainability or fair trade.
If you’d like to grow your wealth and have more than five years to invest, you could invest in stocks and shares for potentially higher returns. They are more risky than cash, as performance isn’t guaranteed, but returns tend to outstrip both cash and inflation in the long run.
Alternatively, you could opt to boost your long-term retirement wealth and pay the money into your pension.
Here, we take a look at some of the best ways to invest your 20k, and the pros and cons of each.
Pay off any debt
A good place to start is to consider clearing any debt you have. Interest rates have risen sharply recently, which means borrowing has become more expensive in some cases.
Paying off any current debt can help to reduce your interest payments and improve your credit rating, so any future borrowing is cheaper.
If you come into a large lump sum, consider paying off credit card debt, finance plans, or student loans first.
Read more here about whether paying off your student loan early is right for you.
If you have a mortgage, you could also consider making overpayments to reduce the annual interest depending on your terms. This also means you can reduce your mortgage term and be mortgage-free sooner.
It’s worth checking, however, that your mortgage interest rate is higher than any savings rate you might be eligible for.
If you can earn substantially more interest on savings than you can save by overpaying on your mortgage, it might be worth putting the £20k in an ISA or savings account instead.
This can be especially true if you have penalties or restrictions associated with any overpayments.
Set up an emergency fund
Redundancy, ill-health and urgent home repairs can all take an unexpected toll on our finances, so it’s worth having some savings put aside in case of emergencies.
Many experts believe you should have an emergency fund of between three- and six-months’ worth of living expenses set aside.
Depending on your dependents and typical outgoings, that sum will vary, but if you don’t already have an emergency fund in place, this might be the smartest thing to do with £20k.
If you’re looking for a home for your cash savings, you have a few options.
You can pay up to £20,000 into a Cash ISA each tax year. Interest on cash held inside an ISA is tax-free, so you get to keep more of the interest you receive.
An alternative to a cash ISA is a high-interest savings account.
These work in a similar way to Cash ISAs, but you any interest you receive is taxable.
However, due to something called the annual savings allowance, you can earn up to £1,000 a year in interest without paying tax.
However, if you’re a higher-rate taxpayer, this allowance reduces to £500, while additional-rate taxpayers pay tax on all their interest.
Savings accounts are a relatively safe option – you have the security of knowing that your capital is secure, unlike investing in the stock market, where your investments can fluctuate in value.
The savings will hold their value and accrue interest, so as long as the interest rate is higher than inflation rates then you will be making a profit.
Plus, if you have money in a bank or building society in the UK, you get up to £85,000 per person protection if the bank goes into liquidation.
Fixed-rate accounts often pay the highest interest rates, but you won’t be able to access your savings for a specified period.
If interest rates were to increase during that time, you wouldn’t be able to switch providers either. Instant-access savings accounts offer more flexibility but a lower return on your savings.
Invest in your pension
When you pay into a personal pension, you receive 20% tax relief, which works out as a 25% top-up on your contributions.
So, if you were to invest the entire £20,000 in your pension, you’d get a £5,000 top-up, bringing the total to £25,000.
What’s more, if you’re a 40% taxpayer, your pension would get a £13,333 boost, bringing the total to £33,333.
Investing in your pension could be a great way to boost your retirement wealth, but only if you’re happy to lock up the cash until you retire.
The earliest you can access your pension is currently age 55, rising to age 57 in 2028.
You can add extra contributions to your workplace pension, or you can set up a self-invested personal pension (SIPP).
Invest in stocks and shares
If you have no immediate need to access your £20k and you’re prepared to accept a degree of risk, you could consider investing in the stock market.
Investing can be a powerful way to increase your long-term wealth, as investments tend to grow more than cash and inflation over time.
As investments fluctuate in value, the minimum investment timeframe for investing in stocks and shares is at least five years.
This gives time to ride out any short-term volatility.
If you do decide to invest in stocks and shares, you can mitigate some of the risk by diversifying your investment portfolio.
This means buying shares in different types of companies and in different regions around the world.
That way, any low-performing investments are usually balanced by ones that are doing well.
By investing in a stocks and shares ISA, you can shelter any gains and dividend income from the taxman.
You can invest in both cash and stocks and shares ISAs during the tax year, providing your total contributions do not breach the annual £20,000 limit.
If you’re new to investing, you might prefer to buy a fund, which means a professional fund manager selects your investments for you.
You should review your portfolio regularly with a qualified financial adviser to make sure your investments are still meeting your goals.
What would the returns on a 20k investment be?
Below, we show what the prospective growth of your 20k could look like with the effect of compounding.
20k with a £250 monthly contribution
| Time period | 2% return | 4% return | 6% return | 10% return |
|---|---|---|---|---|
| 5 years | £37,694 | £40,582 | £43,676 | £50,526 |
| 10 years | £57,229 | £65,623 | £75,359 | £99,687 |
| 15 years | £78,798 | £96,090 | £117,759 | £178,862 |
| 20 years | £102,611 | £133,157 | £174,499 | £306,375 |
| 30 years | £157,931 | £233,123 | £352,044 | £842,470 |
20k with a £500 monthly contribution
| Time period | 2% return | 4% return | 6% return | 10% return |
|---|---|---|---|---|
| 5 years | £53,306 | £56,831 | £60,587 | £68,841 |
| 10 years | £90,078 | £101,642 | £114,902 | £147,499 |
| 15 years | £130,678 | £156,160 | £187,587 | £274,180 |
| 20 years | £175,503 | £222,491 | £284,856 | £478,200 |
| 30 years | £279,636 | £401,378 | £589,219 | £1,335,952 |
20k with a £1,000 monthly contribution
| Time period | 2% return | 4% return | 6% return | 10% return |
|---|---|---|---|---|
| 5 years | £84,530 | £89,329 | £94,410 | £105,471 |
| 10 years | £155,777 | £173,678 | £193,986 | £243,124 |
| 15 years | £234,438 | £276,302 | £327,243 | £464,815 |
| 20 years | £321,287 | £401,159 | £505,570 | £821,850 |
| 30 years | £523,044 | £737,887 | £1,063,568 | £2,322,916 |
Use our compound interest calculator to find out how your weekly, monthly or annual savings and investments can increase.
Speak to a financial adviser
There’s no single ‘best’ way to invest £20k, what you decide to do with it depends on your investment objectives and personal circumstances.
You may even decide to split your lump sum between two or more of the options above to mitigate risk and maximise your potential returns.
If you’d like more advice on the best way to invest money, Unbiased can match you with an expert financial adviser who can provide investment recommendations that align with your long-term financial goals and needs.
If you found this article helpful, you might also find our article exploring whether 20k is a good salary informative, too.
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