How and Where to Invest $100,000
Ideally, financial experts recommend keeping aside a portion of your salary every month to invest and save for future goals. However, a lot of people struggle to find enough money or keep a steady investment budget throughout life. The failure to do so can cost you your goals. Wasting time when you are young can also add considerable pressure for the later years of your life. However, you can overcome this shortage by investing any surplus funds that you may have.
Surplus funds like a bonus earned at work, money inherited from your parents and grandparents, as well as winning a lottery and other similar events can help you make lump sum unexpected amounts of cash. Seeing this lump sum of money can be a bit overwhelming, and you may be tempted to spend it on non-essentials. However, it is vital to be prudent with your money. Investing your cash carefully and with proper measures can help you double your wealth for the future. It can also help you beat inflation and plan for varied goals like retirement, a child’s higher education, etc. If you need guidance on how to best use and invest your money, reach out to a professional financial advisor who can advise you on the same.
Taking the context of $100,000, here are some ways in which you can effectively use such a high sum of money for your present and future needs:
What to do with 100k
If you are in possession of $100,000, there are a number of ways you can use it. However, the following things can take priority.
1. Build an emergency fund
One of the most critical yet ignored elements of a financial plan, an emergency fund is perhaps the first thing to think of if you have surplus money. Emergency funds can help you cover unexpected financial needs, such as home repairs, monthly sustenance in the case of unemployment, life insurance premiums, loan repayments, as well as healthcare expenses, including hospitalization, doctor’s consultations, health insurance premiums, and other similar needs. An emergency fund can be very important to ensure that you and your loved ones are financially secure in adverse times. If you do not have an adequate emergency fund, make sure to use some of the money to build one first. An emergency fund can be unique to every individual and is usually equivalent to your six to eight months’ salary. When creating an emergency fund, remember to keep the money in an easily accessible account. While parking some money in your bank account is a popular choice for this, in most cases, it ends up being a loss for you because the interest charged is considerably lower than the rate of inflation. So, you end up losing money. Instead, you can consider money market accounts, liquid funds, etc., that offer relatively better returns and immediate access in the case of an emergency. So, your money grows in value, and you can withdraw without any penalties if you ever need it.
2. Pay off your debt
Debt is notorious for multiple reasons. It can erode your savings, slow your pace to reach your goals, come in the way of your investments, and force you to alter your lifestyle. A lot of people start their careers with student debt, which can considerably put them behind their goals in life. Later in life, you may add other types of debt like a mortgage. These high-value loans can be hard to pay off. So, if you have a lump sum corpus of money, you can use it to settle your debt liabilities. When repaying your debt, you can also include the relatively more minor seeming dues like credit and debit card bills. Clearing your debt on time is very important because it not only helps you save more and live a better standard of life but also increases your credit score. The credit score is an essential measure of your creditworthiness and is assessed whenever you apply for a loan. The higher the credit score, the lower the interest rates on your loan, and the lower the credit score, the more interest you pay.
What to invest $100,000 in right now
If you are wondering where to invest 100,000 right now, here are some suggestions that can help:
1. Real estate
Real estate can be an expensive investment, which deters most people from buying property. The high cost of investment can be a concern, as you would likely have to distribute the purchase between a down payment and a loan. However, using your lump sum funds to buy real estate can be a good idea. $100,000 can be sufficient to buy a decent house in most cases. The cost of real estate may be considerably higher in some places like New York, Los Angeles, Seattle, etc. However, you can use this amount for the down payment and cover the rest with the loan. A sum as high as $100,000 can be used not only towards buying a property for your personal use but also for flipping or renting. You can consider flipping a house with a partner like friends or family members, too. The profits and expenses can be shared among all parties. Real estate is also a great avenue to create a regular source of income through rent or lease. You can consider renting a flat to make some extra money or to pay off your home loan. However, no matter which of these options you choose, remember the associated costs for each. For instance, flipping a house would result in expenses like repairs, renovation, marketing, open house, sales, etc. Renting a house can create expenses like maintenance, repairs, etc. So, consider the return on the investment and count the costs to make a well-informed decision.
A 401(k) or an Individual Retirement Account (IRA) can be the best way to invest 100k if you wish to secure your future. Retirement planning is critical for everyone, and if you feel you have been lagging, this can be an excellent opportunity to cover the shortage. However, remember that you would not be able to invest the complete $100,000 in a retirement account. The Internal Revenue Services (IRS) sets yearly limits for a retirement account. For 2022, you can contribute $20,500 annually to a 401(k) and $6,000 to an IRA. Both accounts have a catch-up contribution limit too. This is an extra contribution allowance for people aged 50 or over. In 2022, the catch-up contribution limit for a 401(k) is fixed at $6,500 and for an IRA at $1,000. Now, while these limits may not be high compared to the $100,000, they are still substantial and can alter the course of your future to a great extent. Using the surplus money towards your retirement accounts can help you secure your retirement and remove a significant load off your shoulders. You can use the excess funds to maximize your contributions for the year. If your employer matches your contributions to a 401(k), you would further benefit and receive a higher match for your company. Additionally, if you are aged 50 or above, you can maximize your catch-up contribution limits too.
If you are open to risk and wondering how to invest 100k, you can consider individual company stocks. Stocks can be volatile, but they can also offer a good return on your investment. If you possess adequate know-how of the market, you can consider stocks. However, keep in mind that this can require some research and effort on your part. For instance, you would have to time the market for the right opportunities. You would also need to conduct a technical investment analysis to pick the right stocks. Stock investing can be cumbersome as you have to keep in mind multiple factors, such as corporate announcements, political events, demand and supply, and more. All of these can impact price movements.
If you are looking for some stability in stocks, you can invest in dividend-paying stocks. Dividends can act as a passive source of income for you. Some companies pass on a share of their profits as dividends to shareholders. So, you can build a portfolio of such stocks.
4. Mutual funds
If you wish to invest in stocks but don’t possess sufficient knowledge about the market dynamics, you can consider investing in mutual funds instead. Mutual funds pool money from multiple investors and invest it in securities like stocks, bonds, gold, etc. Mutual fund schemes are handled and overlooked by professional fund managers who make all decisions about the buying and selling of securities. Mutual funds may finally invest in the same stocks that you would if you were investing directly. However, mutual funds have fund managers who work on your behalf. These managers are professionals with years of experience that they can leverage to buy and sell securities at the right time, look for profitable opportunities, and aim to earn high returns. Mutual funds are also significant for diversification, as they invest in a number of different stocks and securities depending on the fund’s objective and theme. Additionally, they also offer varied options for different risk appetites, such as equity and debt, so you can pick them as per your risk tolerance.
How to save $10,000 in a year
Setting a savings target can be great to ensure that you stay on the right path. If your goal is to save $10,000 a year, here are some things you can do:
- Create a budget: A budget sets a roadmap for you to follow through. It specifies how much you should save each month and puts a limit on spending. The more you save and the less you spend, the sooner you can reach your savings target.
- Automate your savings: One of the ways to reach your target is by automating your savings. Automation ensures that you meet your savings rate no matter what. It also helps you prioritize your savings over spending your money on other unnecessary concerns.
- Find side hustles: Having more than one source of income can help you save more. Surviving on a single salary can be challenging, especially if you have multiple financial responsibilities to consider. Try to find an alternative source of income to increase the inflow of cash.
- Limit debt: Debt can be misleading and negatively affect your savings rate. So, try to keep the use of credit cards minimal and stay away from loans unless absolutely necessary.
The answer to whether a 100k a year is a good amount to save depends on your financial situation. It is advised to make your money work for you. This can only happen if you invest correctly and are able to generate substantial returns that counter inflation and offer you financial security in the future. So, try to save as much as possible, and if you find yourself with surplus funds, use them judiciously for the more important financial goals in your life.
If you need to figure out the most suitable investment options for your financial needs in order to maximize your returns, use the free advisor match service. Get matched with 1-3 vetted financial advisors that can help you with your unique financial needs and goals.