Should I invest $20,000 in cash or stocks? The stock market is volatile, and the Fed hiked rates (again).

My child, who is 4, is back home in school with my parents for now. I’m 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’m done with school. My husband and I will probably purchase a house at some point.

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

New Immigrant

Dear New Immigrant,

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

As one immigrant to another: Welcome to America.Congratulations on saving $20,000, and on the forthcoming 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 so whether you have $2,000 or $20,000. It will help you learn about your risk tolerance, and what kind of products are out there for you. Over time, it will increase your financial knowledge, which will also help you when you have more money to invest, and the risk/reward increases proportionately.

You may need to set aside some cash for your education. U.S. citizens have access to federal student aid, but non-U.S. immigrants have less access to federal aid. You can read more on that 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 enterprise editor at MarketWatch, recently wrote. “Retirement accounts and the home a family lives in aren’t part of the financial aid calculation based on the FAFSA.”

Mingli Zhong, a research associate at the Urban Institute, a Washington, D.C.-based think tank, suggests you check out a tax-advantaged 529 saving plan for college. “When calculating your assets to decide whether you’re eligible and/or how much you 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 through a 529 plan might increase your chance of getting a student loan.” (There are several kinds of 529 plans you can choose from.)

That said, you can set up and max out 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 those aged 50 and older. For traditional IRAs and Roths, those figures are $6,500 with an extra $1,000 for catch-ups. You can also open a brokerage account, or use a robo-adviser. 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 the age of 59½. That’s most attractive when you are far from your income peak. Alternatively, a low-cost index fund is a basket of stocks or bonds that tracks major indices like the S&P 500. “Equities are still the best game in town,” Burton Malkiel, author of “A Random Walk Down Wall Street,” told MarketWatch. “They are the asset class that most dependably has outlasted inflation, has done better than gold, bonds [and] real estate.”

Assessing your risk tolerance

Unlike stocks, CDs, or Certificates of Deposit, are low-risk investments, and have relatively low returns. They act as a sort of safe house for your cash: You lock up your money for an agreed period of time at a specific interest rate. They’re typically short-term investments, and there are penalties for withdrawing money early. You should, therefore, have an emergency fund that will cover 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 are purchasing a home in the near-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. Money markets at brokerage firms offer liquidity, flexibility and rates above 4%. However, if none of this money is considered an emergency fund, but is designated for a home purchase, invest in treasuries. The shorter-term ones are offering returns around 5%. There are inflation concerns, but a risk-free return of 5% is a good one.”

One caveat 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 increases has led to an increase in 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%-5.25%, could also be the final increase too. That means interest rates on some of savings accounts and CDs may be close to their peak.

Janet Lee Krochman, president of Janet Lee Krochman, A Professional Corporation in Costa Mesa, Calif., believes CDs are a good option for you, assuming you don’t need this money right away. “The stock market has been volatile of late and I don’t see that changing in the short term (over the next two years). Plus, with the potential for loss of principal, I would not recommend taking the risk in the stock market vs. the safety of a bank investment.” (If you do invest a portion in the stock market, resist the temptation of buying individual stocks.)

The median annual income for native-born workers ($28,000) is higher than foreign-born workers ($20,400), according to this data from the St. Louis Federal Reserve. Given your savings, you have a head start. In the meantime, you can take the MarketWatch Financial Literacy Quiz and this MarketWatch Tax Quiz to help get you up to speed on 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 U.S. 

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

You can email The Moneyist with any financial and ethical questions at [email protected], and follow Quentin Fottrell on Twitter.

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