If you’re looking to invest $100,000, you have a lot of options, and what you decide to go with can affect what kinds of returns you earn. You could also invest in real estate, or put some of the money into a diverse basket of stocks on the market. No matter what you do, you always want to make sure you’re smart and consider all of your options. One way to make things a bit easier is to find a financial advisor to help you invest your $100,000 and to manage the money as it grows.
Determining What Kind of Investor You Are Before Investing $100,000
There’s another thing you need to do before investing your money: Take a few minutes to think honestly about what kind of investor you are. This also dictates the kinds of investments you make and which services or companies you use.
If you’re interested in doing your own research, creating your own asset allocation and handling trades on your own, then you’re more of a do-it-yourself investor. You probably want to open a brokerage accountthat offers you access to a variety of financial products.
If you don’t have a lot of investing experience or just don’t particularly want to worry about the nitty-gritty of finding investments, you may want to use a robo-advisor. This is a service that builds and manages a preset investment plan, based on your situation and goals. Robo-advisors usually charge lower fees than financial advisors, and they cover the basics of investing.
If you want more in-depth financial guidance, consider working with a financial advisor. An advisor can help you create a comprehensive financial plan and manage investments on your behalf. This option is more expensive than robo-advisors, but it also provides the most personalized help. If you’re on the fence, check out this guide to whether or not you need a financial advisor.
The final piece of the puzzle in your investing style is your risk tolerance. If you have high-risk tolerance, more of your portfolio will be invested in equities (stocks). You might also be more willing to invest in smaller companies, which means both a greater opportunity for growth and a greater risk of loss.
A robo-advisor or financial advisor can both use questionnaires to gauge your risk tolerance. You can also use anasset allocation calculator to measure your risk tolerance and choose investments accordingly.
Investing $100,000 for Retirement
Saving for retirement should be a major goal for everyone. If you haven’t saved much for retirement yet, putting $100,000 toward your retirement accounts can make a big difference. How exactly you save will depend on your individual situation.
If your employer offers access to a tax-deferred account, consider making a maximum contribution. Common examples are 401(k), 403(b) and 457(b) plans. The maximum annual contribution for all of these is $22,500 in 2023. In addition, if you’re over 50, the IRS allows for annual “catch-up” contributions of an extra $7,500 in 2023. At the very least, make sure you contribute enough to max out any matching that your employer offers.
These accounts are useful for retirement savings because you don’t have to pay taxes when you contribute, or as your accounts grow. You only pay income tax when you withdraw the money in retirement. Contributing the maximum means smaller paychecks, but if you have $100,000 to spare, then you can likely afford the dent in your monthly income.
After you contribute to your employer’s retirement plan (or if your employer doesn’t offer one), consider maxing out an individual retirement account (IRA). A traditional IRA provides the same benefits as a 401(k). You pay tax on your funds when you withdraw them, but the money that goes in is pre-tax; since it’s not a paycheck deduction like a 401(k), this means you get to deduct the money you contribute on your taxes. Another option is a Roth IRA, which allows you to contribute after-tax money.
A Roth IRA is probably preferable if you’re early in your career. Because you probably have a lower income than you will have later in your career, you can save money by paying the income taxes now instead of later. With IRAs, you have a combined contribution limit of $6,500 in 2023, so make sure to think about where you want to contribute to a traditional IRA or R0th IRA. And similar to 401(k)s, IRA account holders over 50 can contribute extra catch-up contributions of up to $1,000 in 2023.
Best Investments for Your $100,000
Whether you’re investing for retirement or some other goal, the big question is: What investments should you actually buy? Below is a rundown of four popular options for you to consider.
1. Index Funds, Mutual Funds and ETFs
If you’re looking to invest, there are a lot of options. Mutual funds and exchange-traded funds (ETFs) are all good ways to create a diversified portfolio of investments.
Mutual funds are effectively baskets of investments. They might be all stocks, all bonds, or a combination thereof. Mutual funds have a manager – a person who is choosing what to include within the fund. This could provide a nice in-between for people who want to invest in individual funds but don’t have the time or know-how to research every stock. So instead, you just research a mutual fund and/or mutual fund company.Then you leave the specific investment decisions in the hands of the fund. The big trade-off is that some mutual funds, especially actively-managed funds, can have high management costs.
ETFs are similar to mutual funds, but they trade like stocks. They often, but not always, have lower costs than mutual funds. You can invest in just certain types of companies (e.g. large corporations), specific sectors of the economy (like technology or healthcare) or in other types of investments, like bonds and real estate. There are also ETFs that center on an idea, such as supporting renewable energy.
Within the world of mutual funds and ETFs, one popular option is index funds. Rather than having a manager who actively picks stocks and makes trades, index funds attempt to track the performance of a single market index. For instance, an index fund might track the S&P 500 index (the 500 largest publicly traded American companies). The result is that you can easily (and often cheaply) invest in a wide range of companies. This provides you with some protection in case certain companies or sectors of economic struggle. Index funds tend to outperform actively managed funds over the long term.
2. Individual Company Stocks
When many people think of investing, they imagine picking that one stock that’s going to take off as the next Apple or Amazon. The truth is that trading individual stocks is time-consuming and risky. You need to do thorough research on companies, and ideally, you’ll be well-versed in methods of equity analysis like technical analysis and fundamental analysis.
While there is potential for big gains for portfolios built around individual stocks, there’s also potential for big losses. There’s nothing wrong with using your money to invest in this way, but it does require a fair amount of time and knowledge.
3. Real Estate
If you want to invest in real estate but don’t know where to start, consider investment funds. REITsare particularly popular and allow you to invest in real estate without buying any property yourself. There are also ETFs that include multiple REITs, allowing you to track the real estate market as a whole.
For people who want to purchase property, $100,000 is enough, in many places, to make a sizable down payment. If you live in a very expensive area like New York or Los Angeles, consider purchasing a property outside of your city or even out of state. Living in one state and owning property in different states could complicate your taxes, but don’t let that discourage you if you want to buy property. Just make sure to first speak with an expert, like a financial advisor, for advice on how to best set up and manage your finances.
4. Savings Accounts, MMAs and CDs
If you already have investments or if you just aren’t quite sure yet how you want to invest your money, there are some safe places you can store your money. The simplest way to save your money is in a savings account. Most big banks offer very low-interest rates on their savings accounts (think 0.05% or less). Instead, look for a high-interest savings account, typically with an online financial institution.
Another safe place to park your money is in acertificate of deposit (CD). A CD has a set term, ranging from a month to up to 10 years.You can withdraw your money but you’ll forfeit part of the interest earned. The trade-off for this reduced liquidity is higher interest, and longer terms generally have higher rates. You might also get a higher rate with a jumbo CD, which are specifically for balances of $100,000 or more.
CDs require you to give up access to your money for a while, but they offer a guaranteed payout. And so long as the bank is FDIC-insured, your money is safe.
Factors to Consider Before You Start Investing $100,000
Before investing any of your money, you should strongly consider making sure that your finances are in good order. You don’t want to hurt yourself financially just to put more money into your investment account. Your finances should all be working together towards a singular goal. Taking into account the following factors will ensure you’re in a good place to start investing.
Pay Down Your Debt
If youhave debt with a high-interest rate, your best bet is to pay this down before putting anything in the market. That includes credit card debt and debt from other loans, such as payday loans. The average credit card interest rate is 16%, which is significantly higher than the average annual stock market return. In many cases, this means that wiping out high-interest debt is a better use of your money than investing in the market.
If you have debt on multiple credit cards, consider a balance transfer credit card. This allows you to consolidate your debt and tackle it all at once. It might even have an introductory 0% APR, allowing you to put interest on pause while you pay it down.
Create an Emergency Fund
Another thing that’s important to prioritize is an emergency fund. An emergency fund is simply money that you set aside for yourself to use when something comes up. As an example, what would you do if you unexpectedly lost your job? Would you have enough savings to bridge the gap until you found another job? What if your car suddenly needed a big repair or if you got sick and had to pay some medical bills?
With an emergency fund, you have money set aside to help you through these challenges. Make sure it’s well-funded to account for any number of financial hardships you might encounter. For most people, a strong emergency fund covers six months’ worth of living expenses.
How much you put in your emergency fund, and where you keep it, is a matter of risk tolerance. The safe route is to go the full six months and keep it in a deposit account where there’s no risk of losing principal, like a savings or money market account. Others might keep as little as three months’ worth of expenses. They might also choose to invest the money in their fund, willing to risk their principal a bit if it means seeing a higher return. However, you approach it, though, make sure you have a liquid emergency fund that can last you at least a few months.
Account for the Capital Gains Tax
Capital gains taxes are an extremely important factor that you’ll want to account for when you invest your money. If you manage your money without following the sometimes very specific rules related to investment taxes, you could find yourself with a hefty bill at tax time. For example, choosing investment types that are more likely to be long-held will often afford you better tax treatments.
The capital gains tax is split into two categories: short-term and long-term. Short-term investments are those that are bought and sold within a year. Long-term investments, on the other hand, are purchased and held for at least a year and a day.
Short-term rates are the same as standard income tax rates, so if you make significant money investing $100,000 on top of your normal income, rates can get as high as 37%. However, if your investments can reach the long-term status, tax brackets will range from 0% to 20%, saving you quite a bite on your federal tax bill.
Employ Diversification in Your Portfolio
Whenever you invest any money, it’s important to ensure it’s diversified throughout many different areas of the market. This is done to avoid an “all eggs in one basket” approach that can lead to major volatility in your portfolio, particularly with something like individual stocks. That’s because if you invest all $100,000 in a single company, you’ll be prone to the ebbs and flows of that company’s stock.
This same principal can also apply to larger sectors of the economy, like technology or healthcare. Putting all your money into, say, tech stocks and ETFs might seem like a good idea to some, but should that market see a major dip at any point, it’ll affect all of your assets at once.
Instead, experienced investors and financial advisors alike will look to spread their money across multiple sectors and investment types. For instance, a diversified portfolio might contain ETFs, company stocks, municipal bonds, REITs, mutual funds and more. This, in principle, allows your money to avoid seeing major shifts in short periods of time.
Should You Invest All of Your Money at Once?
Even if you’re planning the perfect asset allocation, it’s a good idea not to invest all your money. Instead, consider spacing out your investments over time through a strategy such as dollar-cost averaging. Dollar-cost averaging is a simple investing strategy where you invest a fixed amount of money at regular intervals. For example, let’s say you want to invest $6,000 in one ETF. With dollar-cost averaging, you might invest $1,000 a month over the course of 6 months instead of investing it all at once.
The advantage of spacing out your investments is that you face less risk of spending all your money on an asset while it has a high price. While markets go up over time, corrections and even crashes do happen. If you have the bad luck to invest your entire $100,000 right before such a downturn, you’ll lose big. By spacing out your investments, you mitigate this risk.
As you might imagine, dollar-cost averaging is most useful for assets that see regular fluctuations in price. It’s not necessary if you’re putting your money in, say, a CD, where there’s little or no risk of loss.
The Bottom Line
With $100,000 to invest, you have options. You can park it somewhere safe, like a CD or high-interest savings account, or you can take a little risk and invest in the stock market. If you go the investing route, you can choose how much risk you want to assume. The right index fund gives you adiversified portfolio for a low price, while trading individual stocks may produce big gains. There are also investment options outside of the stock market, such as real estate.
No matter how you choose to invest, start by paying down your debt and building an emergency fund. Then consider putting as much as possible in tax-advantaged retirement accounts. Finally, make sure you consider your risk tolerance and create a strong financial plan before you start making investment decisions.
Tips for Investing
- Getting professional help can make managing your investments easier. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Knowledge is half the battle. Make sure you know what taxes you may have to pay on your investments with SmartAsset’scapital gains calculator.
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Derek Silva, CEPF® Derek Silva is determined to make personal finance accessible to everyone. He writes on a variety of personal finance topics for SmartAsset, serving as a retirement and credit card expert. Derek is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance® (CEPF®). He has a degree from the University of Massachusetts Amherst and has spent time as an English language teacher in the Portuguese autonomous region of the Azores. The message Derek hopes people take away from his writing is, “Don’t forget that money is just a tool to help you reach your goals and live the lifestyle you want.”
