So you've got $100,000, and you're feeling excited about turning that money into more money. You want to know how to invest 100k, but you're not sure what the best way is. It's a lot of money, and you have a lot of choices about where to put it!
In this article, we will look at the options you have to invest $100,000, what you should do before you invest, and how to know what type of investor you are.
Best Ways to Invest $100k
Step 1: Pay Off Debt & Create an Emergency Fund
You're probably reading this because you want to invest your money right away, but there are few things you should do before you start investing. It's important to get your finances sorted before you invest all that money, so you don't regret it later.
Pay Off Your Debt
If you have a lot of debt, especially high-interest credit card debt, then use that $100k to pay it off. There are a few reasons why you should prioritize paying off your debt before you start investing.
- For one, debt accumulates interest. The longer you wait to pay off your debt, the more money you will owe.
- Second, if you owe a lot of high-interest debt, the money you owe will only continue to grow. The average interest rate for a credit card is 16%. That's a lot more than you will likely make from investing in the stock market.
Create an Emergency Fund
It's always important to have three to six months of living expenses saved up in case you lose your income or have an unexpected expense, like fixing the plumbing in your house, or car maintenance. It's better to have a chunk of money set aside for things you haven't planned for, so you don't have to use your credit card when the brakes on your car need to be replaced. Don't have an emergency fund? Start saving using an online bank like Radius Bank
Step 2: Understand Which Kind of Investor You Are
Before you start investing your money, you need to decide which type of investor you are. Knowing this will help you determine what kinds of investments are best for you, as well as what types of services you should use. There are a few things to think about when it comes to deciding on your investing style.
Experienced vs. beginner investors
Do you have experience with investing in the stock market, or is this your first time? If you are new to investing, then make sure to do as much research as possible (you can start with our “how to invest guide“). Avoid risky or complicated investments, at least until you have an understanding of the stock market. A stockbroker we like that is great for both beginners and experienced investors is Merrill Edge. You can get a self-directed account or have the experts at Merrill Edge manage your portfolio for you.
DIY or passive investing
Do you like doing research on companies and following the stock market daily, or does it stress you out? If you find you like a hands-on approach to investing, then you're probably a DIY investor. On the other hand, if you find investing stressful, then you might want to consider passive investing, such as investing with a robo advisor.
Independent investing vs. using an advisor
You can also decide between choosing stocks and other assets on your own, or you can employ the services of a financial advisor to help you determine the best investment strategy that meets your needs. You can use the services of Paladin Registry to find top-rated advisors.
All investing has a certain level of risk. Some investments are riskier than others. The higher the growth potential there is, the higher the risk. If you're okay with taking higher risk, then that determines what you invest in. For example, if you're OK with high-risk investments, then you might mostly invest in stocks. But if you're close to retirement or don't want to take much risk on losing your investment value, then you will probably want to invest mostly in bonds.
Step 3: Investing for Retirement Should be Your Top Priority
Whatever you decide to invest in, your priority should be investing for your retirement. Putting $100,000 towards your retirement fund can really help it grow.
There are a number of tax-deductible retirement accounts you can set up, to make sure you are getting the most of your investment fund. If you have an employer, you can set up a 401(k) and invest the maximum contribution allowed. This is an especially good idea if your employer offers 401(k) matches. It's an easy way to get extra money into your retirement account.
You can also set up an Individual Retirement Account. There are two types of IRAs:
- A traditional IRA includes the same benefits of a 401(k), but you are the one putting the money into your account, not your employer. You can deduct the money you contribute on your taxes because the funds are not taxed until you withdraw them when you retire.
- A Roth IRA is similar, except that you pay taxes on the money before you contribute. That means you won't owe any taxes when you retire and withdraw the funds. You can open a Roth IRA with a stock broker like E*TRADE.
You can find out more about the different IRAs and which one makes the most sense for you in our retirement guide. And to make sure you're on track to retire, use a personal finance software like CountAbout. With CountAbout's FIRE widget you can track your monthly expenses along with any potential passive income and plot them over time to see if you will have enough to retire.
>>Further Reading: How to Invest for Retirement
Step 4: Choose Between Passive Investing and Active Investing
Regardless of whether or not you want to invest your 100k for retirement or want to invest it in using towards another financial goal, like paying for your kid's college, there are several options available. Below we break down the top investing options if you're investing $100,000.
Passive Stock Investing With A Diversified Portfolio
For those looking for a more hands-off way to invest, consider passively investing in the stock market. $100,000 put into a mutual fund or index fund is a great way to jumpstart any investment portfolio!
You can do this by signing up for a robo advisor like Betterment or Ellevest. These companies all offer various funds that you can invest in, such as exchange-traded funds or mutual funds. With a broker or a robo advisor, your investment is often adjusted regularly to make sure it matches your risk profile.
ETFs and mutual funds are also a great investment option for the hands-off investor because your money is spread across multiple stocks, which helps mitigate the riskiness of the stock market. And through them, you can also invest in things you care about. For example, Aspiration offers ESG investing options, which is short for environmental, sustainable and governance standards.
How to split up your money
That $100,000 could be put all into one account, such as a taxable brokerage account. Or you can divide it up between retirement accounts and a taxable account to take advantage of some of the tax perks that retirement accounts offer.
For example, in 2019 the 401(k) contribution limit is $19,000, and for 2020 it's $19,500. You could put the limit into your 401(k). From there you could also max out a Roth or traditional IRA with $6,000.
Now you have $75,000 you can put into a taxable account. Look for low-cost index or mutual funds at a brokerage that you like. Putting your $100,000 into passive investment accounts is a great way to let your money grow over time. That 100k could turn into $500,000 over a decade, without your paying much attention.
Active Stock Investing- Trading Individual Stocks
As is obvious from the name, active stock investing is much more hands-on than passive investing. This type of investing is best for people who are interested in following the stock market trends and reports and buying and selling within their portfolios to reflect market changes they think will bring them more money.
With active investing, there's the chance that you can turn that $100,000 into much more money much faster than you can with passive investing. It will also take more work. And of course, there's never a guarantee in the stock market!
You can put your money into individual stocks that you've researched and companies that you understand and believe in. Track performances to make sure that you're hitting your goal, and buy and sell as needed. If you want to buy individual stocks, you will need to set up a broker account. You may also be able to buy individual stocks with some robo advisors, like TD Ameritrade or our favorite, Ally Invest
Real Estate Investing
You can manage it on your own and rent out the rooms and homes to generate income. Or you can have a service manage everything for you. People will always need a place to live, and real estate can make for a great buy-and-hold investment strategy.
A few things to consider: Real estate investing has a much higher entry point than other types of investing. When it comes to residential real estate properties, the general advice is to put down 20% of the total price. If you don't do so, you'll have to pay PMI (private mortgage insurance). That's an additional fee each month that gets rolled into your mortgage payment.
Down payments can range dramatically, depending on where you buy your house. However, it's a safe bet that it will be a few thousand dollars at the very least. The median down payment in the second quarter of 2018 was $19,900, according to a study by ATTOM Data Solutions.
Real estate can be a lot of work to manage, so keep that in mind. If something breaks and you're the landlord, you need to fix it. You'll also have to collect rent, find tenants, create leases, and pay taxes on your property. Or as mentioned, you can pay a service to do all this for you.
If you don't want to buy and manage a property yourself, you can still invest that $100,000 in real estate investment trusts, or REITs. With a REIT you invest in a company that invests in real estate, effectively making you a property owner without actually buying the property. Fundrise and Crowdstreet are two companies that offer REITs and it’s easy to sign up on their websites.
Another way to invest $100,000 is in peer-to-peer lending or P2P lending. This is an alternative investment through a platform that allows borrowers to borrow directly from an individual, or peer, instead of going to a bank.
These types of platforms have been around in the U.S. since 2006 and have democratized the lending landscape. Borrowers can request loans on these platforms for a variety of amounts, and lenders can invest with as little as $25. Essentially you get to help other businesses and borrowers and get paid interest to do it.
Peer-to-Peer lending platforms
There are a number of peer-to-peer lending platforms including Funding Circle, Prosper, RateSetter, and Zopa. It's easy to invest with a P2P platform. All you have to do is sign up on the platform you choose, choose how much you want to invest, and give the platform your money. The platform then gives the money to the borrower and you get the money back plus interest when the loan is paid back.
Just remember that like all investments, there is a risk that the borrower will default on their loan and you could end up losing the money you invested, so make sure to do your due diligence on these platforms and borrowers before investing. Most platforms vet borrowers and are upfront about their vetting process.
Some say there's no better investment than yourself, and it's hard to argue with that. One of the best ways to invest in yourself is by saving.
Use that $100,000 to build up your cash savings and eliminate debt. Using this money to eliminate your debt means that you free up those former debt payments in your budget every month from here on out. If you were paying $1,500 in debt, now that $1,500 can go toward investments each month. That creates money for you over the long term. The upfront investment to stabilize your finances allows them to grow more freely over time.
Step 5: Take It Slow & Let Your Money Grow
The best way to invest $100k depends on your financial situation, but there's no lack of options! Making the right choice with your $100,000 is up to you. The great thing is that you can use any of these options in combination with others. You can put $25,000 of your money down on the house and then invest $75,000 in passive index funds. You can pay off $50,000 in debt and use the remainder to buy two rental properties.
There's nothing that says you have to invest all that money at once. Sit down and do your research on each option as it relates to your life. Consider what the real estate market is like in your town or if you want to grow your retirement account use a robo advisor such as Betterment to handle your money hassle-free. Understanding all your options will highlight the best way to invest $100k for you.