With the new year just around the corner and New Year’s resolutions on the horizon, now is the perfect time to get a jump start on your finances.
Even if last year wasn’t your year financially, you can take certain steps this year to set yourself up for financial success down the road. Maybe, you’ve managed to build some savings. Why not put that money to work in the upcoming year?
Here are a 3 practical ideas to “invest” $10,000 in 2023 and beyond:
- Take advantage of any matching accounts
- Invest in YOU
- Pay down any high-interest obligations
1. It’s a match! Take advantage of any “free money” your employer offers
If you have a 401(k) or other retirement plan, check to see if your employer matches your contributions. If so, take advantage of the free money!
Often, employers will encourage their workforce to save for retirement by investing alongside their contributions to a qualified plan. Many employers match each dollar you invest in your 401(k). Often, the limit their match up to a certain amount of your base pay (say, 5%-6%).
Taking the employer match is akin to free money!
If your employer matches each dollar you invest, you’ve essentially already realized a 100% rate of return on your investment on day 1. Even if your company only matches a percentage (say, $.50 on each $1 up to 5% of your base pay), you’re still receiving IMMEDIATE double digit returns.
Plus, your contributions and your “free money” have the added benefit of growing in the market. You receive both capital appreciation and yield dividends. Over time, these contributions compound until you reach retirement.
Often, employers will also offer matching programs outside of retirement accounts.
For example, you may have the option to choose a High-Deductible Healthcare Plan (HDHP). In conjunction with the lower premiums and higher deductible, your plan may have the option to sock money away in a Healthcare Savings Account (HSA).
If you are lucky, many employers will make direct contributions to your HSA even if you don’t. This is designed to help offset the cost of the higher deductible. Even if your employer doesn’t make outright contributions, some employers will match up to a certain amount.
Why not take advantage of any free money in this account? More than likely, you’ll eventually have a need for healthcare. The money doesn’t expire and can be rolled over each year. Further, both you and your employer’s contributions can be invested. As an added benefit, your contributions are tax-deductible and any investment gains are tax free when used for qualified healthcare expenses.
Watch out for IRS limits
For both 401(k)s and HSA accounts, keep in mind the total contribution limits. More than likely, you won’t reach the IRS limits for your 401(k) unless you have an unusually high income and above average matching benefit. For 2020, the IRS raised the contribution limit for 401(k)s, 403(b)s, and other retirement plans to $19,500. To reach this maximum, you would essentially need to invest your full $10,000 and receive a 100% match from your employer.
However, for HSAs, the limit is much lower ($3,550 for individuals and $7,100 for family coverage in 2020). Therefore, be especially careful you do not over-contribute.
Contributing too much to a retirement plan or HSA can lead to unwarranted taxes and penalties.
However, any account with an employer match provides a great place to put some of your $10,000 to work in 2020!
2. Invest in YOURSELF
If you already have an established, profitable career that you enjoy, receiving those matched dollars from your employer is a great place to start putting $10,000 to work.
However, if you are underemployed or hate your job, consider investing a portion of the $10,000 in yourself. For almost everyone, their income is the greatest wealth building tool imaginable.
From furthering your education to starting your own business or side hustle, investing in yourself could pay returns well in excess of any other investment.
Consider a few ways you can invest a portion of your money in yourself in 2020.
Expand your formal education and/or skills
Furthering your knowledge and skill-set is key to staying ahead in the job market. However, expanding your education does not have to cost a fortune or even be in a formal classroom setting.
You can develop your skills and become more marketable without obtaining an Ivy League education or even spending your full $10,000 on unnecessary educational endeavors. Instead, consider your long-term goals.
What do you want to do in 10, 15, or 20 years?
Once you have determined what you want your future life to look like, break up your goal into measurable steps. Continually monitor where you stand on the journey to accomplishing your ideal scenario.
For example, maybe you dream of being an engineer. You have always enjoyed math and solving complex problems. Plus, engineers are notorious for earning a great living. Ask yourself, what skills or education do I need to make me competitive in this field?
Most engineers invest considerable time in learning their trade. Often, they have a 4-year degree in an engineering discipline and practical experience. In this case, investing your money in higher education makes perfect sense. Not only does it put you on the path to landing your dream job, the ROI on obtaining the degree will be much higher than the cost.
Alternatively, maybe you enjoy working with your hands and dread the thought of being cooped up in an office environment. While formal education may be a viable option, you’re probably better off investing a portion of your money in obtaining certifications and specializations. Valuable work experience and establishing a solid reputation will go much further in these vocations.
Perhaps, you’ve already obtained the education necessary to do what you want. However, you just haven’t landed that “dream” opportunity. Instead of opting for a six-figure MBA or other master’s degree, maybe you could spend a much smaller portion taking one or two specific classes in a complementary discipline.
Maybe, instead of formal education, you could spend a few hundred dollars to join an association that will allow you to learn practical skills and network. Simply putting yourself in the room with people who could potentially refer you to your dream role could be the best money you’ve ever spent.
Investing in a traditional/formal college education
Higher education at any cost is not the best idea. As a prime example, consider the $1.6 trillion student loan crisis that is crippling America’s youth.
However, many capable individuals may find themselves “stuck” because they haven’t gained the knowledge or experience necessary to achieve their goals. Often, employers mandate their workforce hold specific degrees for certain roles. This could require you to receive formal education just to get your foot in the door.
While education is no guarantee of success, the return on investment of a higher education may be worth exploring. In fact, a study conducted by the Federal Reserve Bank of New York found that the return on investment of both an associate’s and bachelor’s degree hovered around 15% over the last decade. This is ~5% higher than the long-term average of the stock market.
If you haven’t completed your required degree program, consider enrolling in a local community college or public, in-state, 4-year university. Numerous studies have concluded that your success is not predicated on where you went to school. Instead, your success is dependent upon choosing a degree in an economical field of study, maintaining excellent grades, and demonstrating to employers that you have the skills necessary to succeed. If you can accomplish the above, you will earn well in excess of a 15% ROI on your education.
Obtain certifications or obtain licenses
As a more economic alternative that formal education, consider pursuing certifications or other licenses that will help you learn and prove to employers your value. This will coincidentally help you command a higher salary.
For instance, perhaps you are an accountant or bookkeeper looking to increase your income. If you already meet the college credit requirements, you could consider obtaining your Certified Public Accountant (CPA) licensure. Not only would obtaining this license greatly increase your marketability and demonstrate your knowledge and skills, simply gaining this credential would allow you to substantially increase your salary. In fact, the average CPA earns about $40,000 more annually than the average non-CPA. Plus, this opens up the door for promotion or other career opportunities.
Sitting for the CPA exam and getting licensed will still be expensive. Generally, you can expect to spend $1,500-$3,000 depending upon the prep course or number of attempts it takes to pass. However, this is still substantially less than obtaining a master’s degree in accounting.
Especially if you don’t have formal university education, achieving certifications could provide a valuable tool to increase your income. Maybe, that welding certificate could help boost your income from $30,000 to $80,000 over time. Perhaps, becoming a master plumber will help you earn that elusive six-figure income.
Along with experience, certifications could be an economic way to invest in yourself in 2020 at a fraction of the cost of formal education. This could be a great place to allocate a portion of your $10,000.
Join societies, clubs, or organizations
Another great place to invest a portion of your $10,000 in 2020 is in dues for specific clubs or organizations.
Especially, if you’re looking to advance your career, increase your sales, or further you knowledge, joining a specific society in your career niche could provide opportunities to attend conferences, luncheons, or other networking opportunities.
While spending money on these organizations will have a negative return on paper, you can turn these relationships into gold depending upon your level of involvement. Perhaps, you join the local chapter of national society for finance professionals. By attending weekly meetings, you have the opportunity to network and potentially meet your next boss. By getting involved in a leadership role, your current or future employer may view you as a valuable asset and compensate you for the prestige.
Perhaps, you are a local and upcoming real estate agent. Joining a local association could help you stay abreast on the local market dynamics. Further, you could potentially land future clients or investment partners. Even if you are an experienced broker, perhaps you can identify the next rising star to add to your business.
For individuals who find themselves “tapped out” in their career and don’t want to pursue a MBA or Ph.D., simply spending a few hundred dollars a year on membership dues in relevant societies could be a great way to earn a substantial return on investment down the road.
Open a business or start a side-hustle
Looking for a way to earn extra income? You’re not alone! In fact, nearly 50% of Americans have a side hustle to generate extra money.
Starting a business that you can run in addition to your W-2 job could be the perfect solution to expedite your savings goals. Perhaps, you could even grow your side business into a full-time gig. This could help you transition away from that boss you hate. Maybe, starting your own business will allow you to build the work/life balance you’ve always dreamed.
By starting your own business, your upside is virtually unlimited. While being the owner brings additional risk and stresses, you have the power to make your business prosper. Plus, you’ll reap the rewards of success.
And your side hustle doesn’t have to feel like work!
Hopefully, you have some idea of a side hustle you’d like to pursue. More than likely, this business idea centers around a hobby or activity you actually enjoy. If you think there’s no way you can earn a full-time income doing something you love, why not “dip your toe in the water” and see if you can make any money at all? You could end up finding an underserved area of the market. Perhaps, there’s more opportunity than you initially identified.
Plus, working won’t be a drag if you’re living your passion. For example, maybe you love fitness. Why not pick up a few shifts a week at the local gym? Maybe, you can become a certified personal trainer and help others achieve their health goals. Perhaps, you can become an instructor and get those expenses boutique classes for free!
If you’re a CPA and hate working at your firm during tax or audit season, why not start financial coaching or tax planning service for individuals on the side? (if you have the experience and expertise, of course).
Starting a side hustle doesn’t have to cost anything but time
While you may be looking for a place to invest $10,000, your side hustle may not require much investment at all.
If you have a lawnmower and blower, you could cut a few neighbors’ yards throughout the year. If you have a vehicle, you can subsidize the cost by driving with Uber or Lyft. You could deliver groceries, pizza, or use another delivery service. Perhaps, you can even rent your car or truck out to generate side income!
None of the above have any real start up costs. With those activities, the work is immediately accretive to your bottom line income.
Using some of your $10,000 for startup business costs
Obviously, not every business idea can be started for without a little seed capital.
For most people, $10,000 is a lot of money, and the thought of losing it all immediately in a single venture probably keeps you from taking any risk at all.
However, if you’ve managed to identify a side gig but fail to get started do the initial cost, why not use some of your $10,000 to give it a trial run?
Before gambling away your hard-earned money, perform a little due diligence on the business idea. Here are just a few preliminary thoughts to consider:
- What services will I initially offer?
- Who are my target customers?
- How big is the market in my area?
- Who will be my primary competitor(s)?
- How can I set my business or service apart from the competition?
- What is the market pricing for the services?
- What expenses (including cost of goods sold and time) will I incur?
This will help you identify any loopholes in your business plan.
After you’ve done your market research and measured the potential for profit, you’ll have much more confidence for investing into your new venture.
Instead of going all in with 100% of your investable money, try testing the waters. As an example, if you’re starting a t-shirt company, it’s probably not best to spend all $10,000 on inventory before you’ve even got a website and online ordering capabilities. Instead, perhaps you can spend 5%-10% on inventory and market through e-commerce sites such as Amazon. This gives you the opportunity to see if your product sells before going all in. As you make sells, you can use the proceeds to re-invest.
Even if you aren’t starting a t-shirt company, the concept remains true. Start slowly and build your business to be self-sustaining.
3. Pay down high-interest debt
Technically, paying off high-interest debt is not an investment.
However, paying off any debt with an interest rate greater than 5%-6% could represent the best risk-adjusted place to allocate a portion of your $10,000.
After all, this provides a guaranteed rate of return on your money at the interest rate on the debt. Further, relieving your debt balance frees up monthly cash flow and will take the strain off your budget. This could go a long way on eliminating the mental drain and worry in your life.
If you maintain substantial balances on your credit cards which come with double-digit interest rates, paying off the balance with your $10,000 provides a much greater guaranteed return than the stock market alone could ever provide.
Investing vs. paying off debt
Paying off any debt with an interest rate greater than 5%-6% could represent the best risk-adjusted place to allocate a portion of your $10,000. Granted, if you have a match at your employer, this provides a guaranteed, 100% rate of return. By the numbers, getting the maximum match probably presents the optimal place for your dollar (mathematically). With any leftover, you can attack the debt before investing elsewhere.
Similarly, paying down a credit card with a 15% interest rate results in a guaranteed 15% return on your capital employed. Obviously, this is a lower rate of return as compared to a 401(k) match. However, paying off debt allows you to feel immediate relief in your budget. This improves your quality of life today. Further, paying off debt frees up more money to invest for tomorrow.
Whether you choose to pay down debt or invest in your 401(k) or other accounts up to the employer match totally depends on your personal risk tolerance and relationship with debt.
My view on the investing vs. paying down debt debate
Personally, I do not have any balances on my credit card or any other high-interest debt. If I did, I would probably pay off any balances with an interest rate greater than 6% using the $10,000.
Instead, I have a relatively small (in relation to my income) short-term vehicle loan at 2.3%. I could have taken the Dave Ramsey approach and paid cash for my truck. However, I would have needed to cash out a substantial portion of my non-retirement investments. While I do not enjoy the hassle of having the loan, I also wanted to maintain the investments in my brokerage account. Therefore, I decided to split the difference and take on a small, low-interest loan while continuing to invest up to the match in my 401(k).
If my loan balance had an interest rate that was substantially higher, my feelings might change based on my personal feelings on debt, risk, and opportunity cost.
However, your situation may certainly be different than mine. While my employer provides a match on retirement contributions, there is a 2-year vesting period. If I were to leave my employer between now and when I’m fully vested, I would obviously lose their contributions. This makes leaning towards paying off high-interest debt more advantageous in my situation.
However, if my employer’s contributions were immediately vested, I would probably still split the difference and do some of both. I may not achieve the full match. However, I would certainly expedite paying down any high-interest debt (10%+). Personally, I tend to be more risk-averse. Plus, I hate the though of owing people money (even at 2.3%). Paying off this debt would help me sleep better at night even though the math dictates I would build a greater net worth by investing over the long run.