If you had $100,000, what would you do with it?
You might spend it, put it towards debt, or save for your kid’s college education. But what if you took it and invested it instead? What would that look like?
Taking that $100,000 and investing it could set you up for a more secure financial future, or help you reach some of those other goals quicker. With so many ways to invest the money, there’s a strategy that almost everyone can be comfortable with.
Here are seven of the best ways to invest $100,000.
- 1 You Know You’re Ready to Invest $100,000 When…
- 2 7 Ways to Invest $100,000
- 3 Understanding Diversification and Risk
- 4 Investing Your First $100,000
You Know You’re Ready to Invest $100,000 When…
The idea of having $100,000 to invest may seem far off for some, but it could happen sooner than you think. You might sell a house for a huge profit, or receive a large inheritance. You may also earn it gradually through diligent savings.
Having the money isn’t the only factor in determining if you’re ready to invest. There are other variables to consider.
Related: 10 Best Investing Books to Read in 2020
You Have an Emergency Fund
Before starting to invest, make sure you have an emergency fund you can tap in case of a financial emergency like losing your job or taking your dog to the emergency vet. It’s recommended that you have three to six months of living expenses set aside, but even $1,000 is a good place to start.
Your emergency fund should be in a place where you can access it quickly if you need to, such as a high-yield savings account.
Your Debts are Paid Off
It’s important to pay off your high-interest debts prior to investing any money. It doesn’t make sense to put your money into an investment earning 5% when you have credit card debt with 17% interest.
Work on eliminating any credit card balances and other high-interest debt before you invest your $100,000.
7 Ways to Invest $100,000
There are plenty of options for how to invest $100,000. To choose the best route, think about what type of investor you are. How much risk are you comfortable with? Do you like to be hands-on or would you prefer an automated investment strategy?
After you’ve thought about these questions, here are eight ways to make that money work for you.
1. Contribute to Tax-Advantaged Accounts
Before you invest $100,000, evaluate the tax benefits of putting that money into a traditional IRA or 401(k). Traditional IRAs and 401(k)s let you deduct the contributions on your taxes. The 2020 contribution limit for IRAs is $6,000 a year and $19,500 for 401(k)s.
If you don’t care about getting a tax deduction now, you can also contribute to a Roth 401(k) or IRA, which will allow you to withdraw funds in retirement tax-free. This is a better long-term choice because you’ll likely be on a fixed income in retirement.
2. Robo Advisors
Investment apps are a convenient way to invest, especially for beginners. The best investment apps are easy to use and help you get started quickly.
Most of these robo advisors will automatically invest and rebalance your portfolio while others let you do it on your own. Some offer special features like investing your spare change or targeting sustainable investments.
People love robo advisors because they have low fees, are easy to figure out and follow a tried-and-true investment formula. Make sure you pay close attention to the fees associated with each robo advisor or app before deciding where to invest your money.
Related: Acorns Review 2020
A bond is an agreement to lend money to a company with a fixed repayment schedule. If you own a bond, you’ll receive the scheduled payments. A bond can also be bought and sold on the open market.
Returns on bonds are typically lower because bonds are less risky. Bonds have a specified repayment schedule and interest amount so they have more reliable returns, if lower than mutual funds or ETFs.
It’s possible, although unlikely, that a company can default on a bond, so there is some risk associated with bonds. Still, bonds are less risky than stocks and can be an important source of stability in your portfolio.
An ETF, or exchange-traded fund, is a collection of stocks, bonds, commodities, and other investment instruments. If you want to invest in a diverse portfolio without doing the research and balancing on your own, ETFs are a strong option.
ETFs are typically managed by a brokerage firm, and the fund manager may change the makeup of the fund daily to take advantage of market conditions. Like stocks, individual investors can buy or sell shares of the fund on the open market.
5. Mutual Funds
Mutual funds offer a lot of advantages for investors. Like an ETF, a mutual fund is an easy-to-buy diverse group of assets maintained by a fund manager. These are good for beginner investors because they’re affordable and easy to understand.
Unlike ETFs, mutual funds are not traded on the market. Instead, you buy a mutual fund by buying into the fund via a brokerage firm. Mutual funds can also offer other advantages over ETFs, like automatic dividend reinvestment and lower commission fees.
Related: 6 Common Pieces of Financial “Advice” That May Actually Be Hurting You
6. Real Estate
If you’re interested in investing in real estate, do your research and speak with people who earn extra income this way. Ask them questions like how much they needed to get started, how much they earn from their rental properties, and how they picked the location of their properties. You should go into this type of investing as fully informed as possible
If you want to invest in real estate without buying a house or apartment building, check out a crowdsourced real estate investment tool like Fundrise, which allows members to invest in commercial properties, rental housing or residential development.
You can start investing for as little as $500, which is significantly less than it would take to buy a property on your own.
Related: 11 of the Best Real Estate Books Every Investor Needs to Read
7. Peer to Peer Lending
With traditional lending, your deposited money is used by the bank to fund their own lending programs. Peer to peer lending cuts out the bank, connecting you directly with people who want to borrow money.
By becoming a lender yourself, you could end up making higher returns than you would via traditional methods – although this is far from a guarantee. Lending Club, a peer to peer lending platform, has historically averaged a 4% – 6% return.
Be aware that this investment carries risk. Make sure you know what happens to your money if one of your borrowers defaults on the loan and if you have any recourse.
8. Stock Market
If you have $100,000 to invest, one option is to buy stocks. A stock is a small piece of ownership in a company, and how many you buy is entirely up to your budget and what the company or your stock broker allows. In some cases, you might even be able to buy one single stock.
You can make a return on stocks in two ways. The first is by receiving a dividend or a distribution that the company makes to the shareholders. The second is by selling the stock when the price has increased from your initial purchase price.
Although you can potentially make high returns on stocks, they can also be very risky. Dividend payments aren’t guaranteed, and stock prices can fall quickly when there’s bad news or speculation about the company’s performance.
Understanding Diversification and Risk
Before you invest $100,000, it’s important to understand two key concepts: diversifying your investments and deciding what level of risk you want to take on.
Investment diversification means having many different types of investments. This includes investing in different industries and investment vehicles. Diversifying your portfolio ensures that you won’t be affected as strongly by trends in specific industries. Pick a selection of stocks, bonds, funds and other types of investments to make sure you minimize risk.
When you’re investing $100,000, it’s also important to decide how much risk you’re willing to take on. Risk refers to the likelihood of losing money and also affects how much your money could grow.
Different types of investment vehicles are considered more or less risky, and there are different types of risk. For instance, business risk refers to the potential for a negative event at the company you’re invested in. This could cause the company’s stock price to fall.
You should consider the overall risk of your portfolio allocation. Generally, younger investors can take on more risk, and older investors should take a more conservative approach. If you invest in commodities like oil, political risk may also be an issue.
When it comes to investing, you should have a wide variety of investments at a risk tolerance you’re comfortable with.
Investing Your First $100,000
It’s important to be smart when you’re investing $100,000. Do your research, determine your level of risk, and consider factors like your current age, when you want to retire, and what’s the best use for your money.
Don’t be daunted by the different options. Meet with a financial planner or use a robo-advisor if you aren’t sure how to invest. If you plan and invest wisely, you can use this as a step towards meeting your financial goals.