How to invest £20,000

Investing can be daunting, especially if you’ve got £20,000 in the bank. It’s time to make your money work harder for you, and get you one step closer to achieving your goals.

One of the simplest ways to maximise your returns is to put your money in an ISA, as it allows you to build up your savings and investments in a tax-efficient manner. The government increased the ISA allowance to £20,000 in April 2017.

If you’ve already put your £20,000 in a cash ISA, don’t panic; you can easily transfer your money from a cash ISA into a stocks and shares one to benefit from the generous tax benefits.

What to do with £20,000

Cash used to be king, but with interest rates at historics lows for some time, inflation has significantly outpaced the returns on easy access cash ISAs.

For example, if you put £20,000 in a cash ISA offering 1.05%¹, you’d have £20,210 after 12 months. If inflation reaches the Bank of England’s 2% target – it’s currently sitting at over 5% thanks, in large part, to Covid-19 – the purchasing power of your savings is going down over time. Not exactly what you want to hear if you’ve got £20,000 in the bank.

Savvy savers have turned to the financial markets in the hunt for inflation-beating returns.

Investing is by no means a quick fix. If you want to buy a house in six months, you shouldn’t expect to double the £20,000 deposit you’ve spent ages saving up – it’s too short a time horizon to invest. In fact, a cash ISA will probably be more suitable – although do check there is no lock-in period.

However, if you want to buy a house, upsize, or help your child on the housing ladder in five years, you might look to the financial markets for the potential to grow your money and offset the impact of inflation.  

How investing can help achieve your goals

Whether you’re saving for your children, embarking on a dream new career, or a comfortable retirement, understanding your financial habits and approach to investing is one of the first steps to achieving your financial goals. This is known as your investor profile and forms part of your investor DNA.

Investing is all about balancing risk and return. By taking the time to think about what you’re saving for and when you’ll want your money, you can understand your tolerance to risk and invest in something that’s right for you and your family.

If you’re going to need your money in less than 12 months, it’s probably best to keep your cash in a savings account. If you have a longer-term investment goal, you can afford to take on more risk and expect higher returns – although your investments have further to fall, too.

The further away your financial goals, the more risk you can take. This means your investment portfolio will have a higher exposure to equities than bonds. Whilst you may experience short-term fluctuations, you’ll have the time for your investments to recover – and hopefully more.

How to invest your £20,000

With £20,000 sat in your bank account, it can be daunting assessing all of your options. Whilst you may want to pick your investments yourself, managing your money takes time, skill and money –it can feel like a full-time job.

The key is diversification. By spreading your money across regions and asset classes, you can reduce the risk in your portfolio. As asset classes rarely perform in line with each other, if one investment falls, you can hope to offset this with gains made elsewhere.

Achieving successful diversification isn’t a walk in the park. You have to calculate your portfolio’s asset allocation and regularly rebalance your investments based on thorough research.  

You may want a professional to invest your £20,000 instead; be careful, though, as expensive management fees can eat into your returns and higher isn’t always better. Good value investing is possible if you shop around, especially through digital wealth managers like Moneyfarm.

How to invest £20,000 in an ISA

Investors fall victim to ‘out of sight, out of mind’ syndrome when the ISA season winds down, but this can have a negative impact on your potential for returns.

Investing your ISA allowance earlier in the financial year means you can benefit from tax-free returns for longer and also give your investments more time to grow. Remember, you can’t roll the ISA allowance over into another financial year, so it’s a case of ‘use it or lose it’.

Five tips to invest £20,000

It’s important to remember every family is different, and whilst what works for you might not work for your friends, there’s a right way for everyone. But here are five tips to help you get one step closer to achieving your goals.

1. Make the most of generous tax benefits by investing your ISA allowance
2. Get cost efficient investment advice with someone like Moneyfarm
3. Invest in the way that’s right for you by understanding your risk tolerance
4. Reduce risk in your portfolio by diversifying your investments
5. Invest regularly to try and maximise your returns  

FAQ

What is the best way to invest 20k?

There is no best way to invest 20K. There are several investment options depending on your risk profile and financial goals, including robo-advisor, pension, ISA, high-yield savings account, peer to peer lending, etc. However, the key to investment is a well-diversified portfolio.

What should I do with 20k savings?

There is no best way to invest 20K. There are several investment options depending on your risk profile and financial goals. For example, you can invest in a robo-advisor, pension, ISA, high-yield savings account, peer to peer lending, etc. However, the key to investment is a well-diversified portfolio.

How much money will I make if I invest 20,000?

It depends on the investment vehicle you used to invest the £20,000. High-yield savings accounts and cash ISAs have low-interest rates (0.5% to 5%), while stocks and shares ISAs have higher returns on investment (9.6% to 13.5%).