How should I invest $20,000? Are savings accounts still a good option?

My son who is 4 years old is back to school with my parents for now. I am due to give birth to a second child in July. Basically $20,000 is all I have to invest for the next few years until I finish school. My husband and I will probably buy a house at some point.

Should I use some of the money I have to pay on the financial aid loan interest for the two years of school, or should I invest some of it in CDs and some in stocks? How should I invest my money over the next 2-5 years?

New Immigrant

Dear New Immigrant,

First, decide how much money you can afford to put away, whether it’s stocks, savings accounts, or CDs. And don’t count on FAFSA.

As an immigrant to another: Welcome to America. Congratulations on saving $20,000 and the next addition to your family. I applaud your willingness to make your money work for you, and it’s never too early to start investing, and you can do it whether you have $2,000 or $20,000. It will help you know your risk tolerance and what kind of products are there for you. Over time, your financial knowledge will increase, which will also help you when you have more money to invest, and the risk/reward increases proportionally.

You may need to set aside some cash for your education. US citizens have access to federal student aid, but non-US immigrants have less access to federal aid. You can read more about it here. “The FAFSA asks families to report their income, as well as certain assets like college savings plans and brokerage accounts,” my colleague Jillian Berman, deputy business editor, recently wrote from MarketWatch. “Retirement accounts and the home a family lives in are not part of the FAFSA-based financial aid calculation.”

Mingli Zhong, a research associate at the Urban Institute, a Washington, DC-based think tank, suggests looking into a tax-advantaged 529 savings plan for college. “When you calculate your assets to decide if you’re eligible and/or how much would be eligible for financial aid, your contributions to a 529 plan will be discounted compared to your investment in a regular brokerage account. So investing in through a 529 plan can increase your chances of getting a student loan.” (There are several types of 529 plans you can choose from.)

That said, you can set up and maximize your retirement accounts. Earlier this year, the Internal Revenue Service announced new maximum retirement contribution levels for 2023. You can contribute up to $22,500 in 2023 for employee deferrals in a 401(k) plan with an additional $7,500 for people aged 50 and over. For traditional IRAs and Roths, those numbers are $6,500 with an additional $1,000 for catch-up. You can also open a brokerage account or use a robo-advisor. The latter uses algorithms based on your age, goals and risk tolerance.

A Roth IRA allows you to deposit money at your current income tax rate and withdraw it tax-free after age 59 1/2. This is more attractive when you are far from your peak income. Alternatively, a low-cost index fund is a basket of stocks or bonds that tracks major indexes like the S&P 500. “Stocks are still the best game in town,” said Burton Malkiel, author of “A Random Walk Down Wall Street,” he said. MarketWatch. “They are the asset class that has most reliably beaten inflation, outperformed gold, bonds [and] real state.”

Assessment of your risk tolerance

Unlike stocks, CDs or certificates of deposit are low-risk investments with relatively low returns. They act as a kind of safe haven for your cash – you lock up your money for an agreed period of time at a specific interest rate. These are usually short-term investments and there are penalties for withdrawing money early. Therefore, you should have an emergency fund that covers at least 6-12 months of expenses. The minimum deposit can range from $1,000 to $10,000. You can now get interest rates of up to 5%, the highest rate in several years.

If you’re buying a home short-term, you don’t have time to be aggressive, says Robert Seltzer, founder of Seltzer Business Management in Los Angeles. “Invest most, if not all, of that nest egg in fixed-income investments. Brokerage firm money markets offer liquidity, flexibility, and rates above 4%. However, if none of that money is considered an emergency fund, but it’s earmarked for buying a house, invest in Treasuries. Short-term ones offer returns around 5%. There are concerns about inflation, but a risk-free return of 5% is good”.

A warning from the Federal Reserve’s decision to raise rates by 25 basis points for the 10th consecutive meeting on Wednesday. The Fed’s interest rate hikes have led to higher yields on savings accounts, certificates of deposit and other low-risk cash investments. However, the latest increase, which brings the rate to a range of 5% to 5.25%, could also be the final increase. This means interest rates on some savings accounts and CDs may be near their maximum.

Janet Lee Krochman, president of Janet Lee Krochman, a professional corporation in Costa Mesa, California, believes CDs are a good option for you, assuming you don’t need that money right away. “The stock market has been volatile lately and I don’t see that changing in the short term (in the next two years). Also, with the potential for loss of principal, I wouldn’t recommend taking the risk in the stock market versus the safety of a bank investment.” (If you invest in the stock market, resist the temptation to buy individual stocks.)

The median annual earnings of native-born workers ($28,000) are higher than those of foreign-born workers ($20,400), according to this data from the Federal Reserve in St. Louis. Considering your savings, you have an advantage. In the meantime, you can take MarketWatch’s Financial Literacy Quiz and this MarketWatch Tax Quiz to help you learn some basics. They are designed to test people’s financial knowledge and also help readers think about budgeting and investing. Good luck to you and your family with your new life in the United States

I wish you every success as you begin your life here.

meu You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com and follow Quentin Fottrell at Twitter.

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