Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
So you got your hands on $20. Cool! It might not quite earn you a place on any of those Forbes richest lists but give yourself a huge pat on the back. Saving any amount of money isn’t easy and resisting the urge to spend that $20 is no small feat. Now it's time to figure out what to do with it.
First two nosy questions. Are your credit cards all paid off? Do you have three to six months of living expenses set aside in case you're not able to work for a while? If the answer to either of these questions is no, we highly recommend putting your $20 towards accomplishing these two goals before investing, because both scenarios involve real and potential credit card debt, and credit card interest rates will almost certainly outpace any gains you might see from investing. If you’ve got those things taken care of, then you can start investing, here's how.
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Factors that dictate how to invest $20
First, you’ll want to assess a few factors that will dictate your next move before investing your $20.
1. Goals and time horizon: The first step is understanding what you intend to do with this little pile of money. Do you plan to use this $20 during your retirement in thirty or so years? Or is this a gift from Aunt Beatrice that you’re going to use to finance a nice vacation in a couple of years time? Goals mean what you intend to do with the money and time horizon is how long you intend to hold a particular investment. In general, a person who's going to need the money within five years will probably want to avoid investing heavily in equities (aka stocks). Generally, stocks fluctuate in value much more than other investments such as government-backed bonds. If you need your money in the short term, the last thing you want is to do is have to withdraw it all when the market is down.
2. Circumstances and risk tolerance: Circumstances covers how much money you have now—and how much money you anticipate you’ll be getting in the future, via factors like inheritance. Money can be liberating — if you have a cushion to depend on and you don't need the money for a long period of time then investing might be a good option for you. Along with time horizon, your circumstances will directly affect your risk tolerance, a term that simply means how much of your investment you can afford to lose. If your $20 was abducted by aliens and your life wouldn’t be materially affected in any way, you have an incredibly high-risk tolerance. If without your $20 you won’t be able to come up with next month’s mortgage payment, your risk tolerance is extremely low. In a situation like the latter, you’d want to put the entirety of your $20 somewhere incredibly safe, a cash equivalent that throws off some interest, like a saving investment account.
The best accounts for investing $20
Don't underestimate the power of choosing the right investment account to store your $20. Taxes are like investment termites — they'll chew clear through your investment if you let them. Ideally, you should do anything you legally can to lower your tax bill. The government has actually created tax breaks to incentivize citizens to save for retirement and other big life expenses. An incredible amount can be saved by investing the maximum possible into what are known as “tax-advantaged” accounts. These investment vehicles either allow investments to grow within them tax-free or only become taxable when you withdraw money years down the line in retirement. Provided the time horizon on these accounts fits with your goals, grab as much of the “free money” as you can by maxing these accounts out first.
Think of tax-advantaged accounts as the top cups in those cool champagne towers; only after the top cups get filled should your money trickle down into other types of accounts. If you don't need your money right away, you should have no trouble at all investing your entire $20 into a tax-advantaged account.
Open an RRSP and/or open a TFSA, both of which offer tax benefits that you should avail yourself of before investing in non-tax advantaged accounts. Which one? Well, it really depends.
TFSA: TFSAs are great for two types of investors: those who don't earn huge salaries and/or those who plan to do something with the investment before retiring, because unlike RRSPs, you won't pay tax if you take the money out pre-retirement.
RRSP: RRSPs are a better idea for people who are making more now than they anticipate they’ll make in retirement since they’ll be taxed at a lower rate when they withdraw the funds down the line than they would now. Though RRSPs have a reputation as being impossible to crack open pre-retirement without huge tax penalties, there are ways to spend the money and not get killed by the CRA. If you want to finance a down payment on a house or fund yours or your spouse’s education you can take an interest-free loan from your RRSP provided you pay it back before the plan collapses.
RESP: If you want some or all of your $20 to be used to fund your kid's university education, you should consider opening a RESP. RESPs are great for three reasons. First, the money grows within them tax-free. Also, it isn’t considered taxable income when it's withdrawn and spent on educational expenses. And best of all, thanks to a program called the Canadian Education Savings Grant (CESG), the government will match 20% of your contributions, up to a lifetime limit of more than $7,000 per child. Yup, the government is willing to give your kid the cash equivalent of a reliable, 10-year-old used car.
Personal Investment Account: If none of the tax-advantaged accounts suite your needs you can always open a personal investment account. This is an account that allows you to buy and sell securities, stocks, and bonds, it just doesn't come with the nice tax-advantages of the other accounts.
Tired of trying to figure out how to invest your $20? Wealthsimple offers state-of-the-art technology, low fees and the kind of personalized, friendly service you might have not thought imaginable from an automated investment service — get started investing in minutes.
Where to invest $20
At last, we’re ready to actually invest that $20 of yours. There are infinite ways to invest your money — alpacas, anyone? It’s necessary to warn you that investments are speculative and past results should never be understood as predictors of future performance. That said, here are the smartest destinations for your $20.
The Stock Market
Here is a totally uncontroversial opinion. If history is anything to go by, one of the quickest potential ways to have made your $20 to grow would have been by opening a trading account and investing in the stock market. But what stocks should you have bought? Chances are you’ve heard stories about some dude who invested a thousand bucks in Amazon in 1997 who now lives in a castle. What you don’t hear about as much, however, are the stories about some other guy who went all in on Snapchat and now lives in his mom's basement. Stock picking is extraordinarily hard. Famously rich stock picker Warren Buffett has spent the last decades discouraging pretty much everyone not named Warren Buffet from trying to make money picking individual stocks and in fact, has encouraged his heirs to invest the lion’s share of their inheritance in low-fee, highly diversified stock funds.
Bonds are another option for your nest egg. Bonds are almost like a loan agreement — essentially, one party gives another party money with the understanding it will be paid back in the future with interest. There are many types of bonds from government bonds to municipal bonds. Bonds are typically seen as a less risky investment when compared to something like stocks. As a result, many investors have some of their investments in bonds. Investing some of your money in bonds could be seen to counteract the volatility of the stock market. While getting into the nitty-gritty of bonds is not for the faint-hearted, investing in them is a little easier. Bonds can be bought directly from the government, via discount brokerages, or online as part of an investment portfolio offered by investment platforms.
Watch enough cable TV, and you’ll assume that anyone with a tape measure and a barrel of hair gel can make millions flipping real estate. In reality, it's a business with huge risks that have been known to ruin unwise speculators. $20 probably won't be enough to cover a down payment on a house or apartment, but there is one way to benefit from the real estate market without having to actually buy property; real estate investment trusts, or REITs, are companies that sell shares in their various real estate investments. Real estate may be a part of some investment portfolios created by robo-advisors.
Exchange traded funds (ETFs) are a catch-all term to describe baskets of equities that can be traded on a stock exchange, so telling someone your investing strategy is buying ETFs is a little like answering “food” when someone asks you to describe your diet. The great thing about ETFs is that since many of them invest your money in hundreds of equities, you’ll minimize risk by not putting all your eggs in one basket. And not only that, buying even one share in a company like Apple or Google is super expensive and sadly out of your $20 price range, but many ETFs will be both within your budget and contain slivers of that very stock. Some ETFs contain stocks, others bonds, and some feature real estate investments. You can purchase ETFs buy opening an account with an investment provider and making trades. ETFs that seek to mimic much or all of the stock market are particularly valuable parts of a balanced portfolio, since if one sector is not performing well, it won't drag down your entire investment. There are many ETFs to choose from. Index ETFs mimic an index like the S&P 500, so for one price you can buy slivers of the 500 most valuable publicly traded companies in America. But one ETF does not a diversified portfolio make; you'll need several different ETFs order to achieve the kind of diversification that most financial advisors recommend. If the idea of putting together a balanced portfolio sounds about as challenging as performing microsurgery, you might a good candidate for a company that specializes in putting together portfolios for people like yourself.
If the sound of buying stock, ETFs or any other type of investment sounds confusing, let alone trying to choose them yourself, automated investing might be a solid option to consider. Online investment platforms, often called robo-advisors, allow you to take a risk survey and build a portfolio to suit your investing goals. Rather than sweating the details, you can have a special portfolio built according to your risk tolerance and goals and get back to the truly important stuff in your life, like those dragons in Westeros. And though some robo-advisors have minimum dollar investments to join that may be higher than your $20, some of the best ones of all allow you to create an entire balanced portfolio of ETFs with just one dollar.
Best way to invest $20
Investments are nothing like that Slanket your mom bought you; one size will absolutely not fit all (and you probably won’t try to re-gift your investments.) So without knowing your specific situation, it’s hard to tell you precisely where to put your $20 dollars. That being said, there are some best practices we recommend for all investments.
Keep fees low Just like taxes, fees are like investment termites too; left unchecked, they’ll devour everything you value. If you can become a cold-hearted fee exterminator, you won’t believe how much money you’ll be able to save over the long term. It’s not uncommon for an actively managed mutual fund to carry a 1% management expense ratio (MER). This means that every year, regardless of how well the fund performs, 1% of the entire fund will be deducted to pay salaries and expenses of everyone who works on the fund. One or two percent might not sound like a huge sum, but one investment advisor showed that a fee of just 2% could decrease investment gains by half over the course of 25 years. Fiddle with a fee calculator to see how trading a 2% MER for a .5% one could affect a hypothetical $20 investment.
Invest in a passive portfolio
Hold on, you might be thinking. If mutual fund managers are super good at picking the best-performing stocks, their fees shouldn’t be a problem since the funds will be throwing off returns that far exceed those of the stock market as a whole. The problem is they’re not. Most studies show that professionals paid to pick stocks will fail to outperform the overall market over the long term. So if active pickers can’t beat the stock market and still charge fees, what's a better route? For most goals, time horizons, and risk tolerances a particularly effective way is through passive investing. This can be done by using robo-advisor. Rather than attempting to beat the market, most robo-advisors attempt to mirror the market by investing in many different ETFs. That's a job easily handled by a computer algorithm. Low fee passive portfolios of ETFs can be designed with any goal, time horizon, and risk tolerance in mind.
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How to invest $20 safely
If safety is what you're looking for then you will need to look for low-risk investments, though you should know that there are no guarantees in investing. Stocks, being naturally risky, will fluctuate in value. In exchange for taking on this risk, investors will generally be rewarded with the possibility of higher returns than they'd get from less risky investments. If you absolutely can’t risk any fluctuation, you’ll be better served with a savings account or a savings product, that typically carry virtually little to no risk. That said, you can't expect the kind of returns you might get from investing in ETFs made up of stocks, bonds, and real estate. In fact, interest rates have lately been so low that inflation is likely to outpace the interest rate, and in the long run, you’ll essentially be losing money by keeping your money stuck in one.
Government bonds come with less risk, but also provide comparatively low returns. Stocks behave a little like a penny tossed in the air; the more times you do it, the more likely it is you'll get to a one-to-one heads-to-tails ratio, and the longer you hold a stock, the more predictable the results will be. The range of outcomes tend to narrow over time, so in the past, those who held onto a variety of stock investments for more than a decade were most likely rewarded with returns that offset any short-term risk.
The conventional wisdom is the longer your investment horizon, the higher the ratio of stocks to bonds your portfolio can contain. If you don’t need to withdraw money in the short term, you can afford to ride the wave of the stock market.
How much can you make by investing $20 – if only we knew!
Without the use of the dark arts, how do you turn $20 into a whole lot more? There's no sure answer to this question. If there was — we'd all be rich. With investing, you can make money, but you can also lose it. That said, if we dust off the history books, we can see how this could have happened in the past. Between the years of 1950-2009, the stock market (S&P 500) grew on average by 7% per year. So, had you invested $20 during that time, the miracle of compounding could have turned your $20 into about $57 in 15 years.
This is based on historical market growth. When it comes to investment advice, there's a very good reason you often hear “past performance, does not equal future results”. It's because past performance absolutely does not equal future results. That being said, if your disciplined, your risk is minimized through a highly diversified portfolio, and fees kept low, you might be very happy with what your $20 grows into in the long term.
Although we're biased, we reckon the absolute best way to invest $20 is with Wealthsimple. We offer state of the art technology, low fees and the kind of personalized, friendly service you might have not thought imaginable from an automated investing service. Get started or learn more about our portfolios.
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