What to Do with 100k
If you’re fortunate enough to have landed on $100,000 you might be wondering what to do with your money. After all, with a lot of money comes a lot of responsibility.
Managing it incorrectly could cost you tens of thousands of dollars.
Whether you obtained your money through years of saving, winning the lottery, or selling a home, there are a few things you should and shouldn’t do with your money.
In this post, we’ll guide you through the process of managing your money effectively to maximize your returns while limiting your risk.
Open a Savings Account Immediately
If you obtained your money through a windfall such as winning the lottery or gambling of some fashion, you should immediately open a high-interest savings account to keep your money safe while simultaneously earning a minimal amount of interest.
Even if your money is kept there for only 30 days, let’s see how much money you can make.
Assume that your savings account offers a 2% annual interest rate that is paid monthly. You will need to divide your interest rate by 12 (.02/12 = .00166667). You will then multiply this amount by the amount deposited (100k). After 30 days, you will receive $166.67 by doing nothing at all.
But this isn’t the primary reason for opening a new account. When first receiving your money, you need to store it in a safe place and a savings account allows for that.
The FDIC will insure up to $250,000 per savings account, meaning that if your money were to get stolen, it would be fully insured leaving you with all of your money intact.
Set Goals for Your Money
After depositing your money in a savings account, you need to better understand your goals and situation. Do you have large amounts of consumer debt? Are student loans crushing your budget? Are you 65+ years of age?
All of these situations matter when it comes to managing your money. Learn how to deal with each below.
Paying Off Debt
If you have large amounts of consumer debt, it’s wise to use your cash to pay it off. It is likely that your debt accrues interest more than 7% annually, making it an obvious choice to pay down.
When it comes to what debt you should pay first, it’s best to choose the accounts with the largest interest rate first then move on to accounts with lower interest rates.
Keep Your Age in Mind
Are you nearing retirement or are you just turning 25? This question matters when it comes to managing your money.
Those nearing retirement will need to choose a much more conservative plan to keep their money more liquid as they age.
Those younger can choose a more aggressive investment plan to maximize their returns while keeping their risk moderate.
Know Your Strengths and Knowledge
Many people fall into the trap of making investments because everyone tells them to do so. If you are actively managing your money, I advise against this.
If you are not knowledgeable about a certain investment, consider getting advice from a professional or avoiding that investment altogether.
If not, you might make investments that might be considered ill-advised without the knowledge to make good decisions.
Establish an Emergency Fund
If you don’t have one already, this is your chance to build your emergency (or rainy day) fund. This money should be used for any financial emergencies like an unexpected trip to the hospital, a job loss, or car repairs.
Many financial professionals advise building your savings to cover 6 to 9 months of expenses.
Create a Plan for your Money
Before making any investment with your money, you need to have a plan in place. This will give you more clarity into your money and where it is at all times.
Will you invest it all into the stock market, or will you split it up among different types of accounts like a 401k or IRA?
Investing in Retirement Accounts
It’s a good idea to maximize your contributions to retirement accounts such as a 401k or IRA. This will allow your money to grow tax-free, saving you thousands of dollars over the years.
The downside? This money cannot be touched until you near retirement without a penalty or taxes owed. You should consider this money untouchable until then.
Other Tax-Advantaged Accounts
If you have children, you could also consider investing through a 529 account that allows you to save for their further education, tax-free.
You can also consider investing in an HSA account to save money for medial costs over the years.
How to Invest 100k
Once you’ve decided the time is right to invest your money, you’ll need to put your money to work.
We’ll outline some common investment strategies for those with $100,000.
Investing in the Stock Market
One of the most common methods of investing money is through the stock market. You can purchase shares of individual companies and be rewarded based on their performance.
When investing in the stock market, you can increase your value one of two ways: through an increase in the price of the stock or through dividends.
A dividend is a cash payment from the company to its shareholders from the companies profits. Older, more established companies will likely offer dividends to investors while the price of the stock remains more stable.
Some people will choose only to invest in dividend-paying stocks, as it can produce cash flow that lasts a lifetime. You can check out this guide to dividend investing to learn more.
The second way you can increase value in the stock market is by an increase in the price of your stocks.
When a company produces results above “street consensus”, the value of the stock will increase, allowing you to sell it for a larger amount than you paid.
However, this value is only realized when you sell your positions. Meaning that without selling your stocks, you will never receive any money for your investment. This is opposed to dividend stocks that can pay cash each fiscal quarter.
Methods to Invest in the Stock Market
In general, I do not advise picking individual stocks for investing, especially with significant amounts of money as they can be extremely volatile.
Instead, you can opt to invest in low fee ETFs or mutual funds. You can think of these as a group of various stocks and other investments that diversify your holdings for you.
There are many different types of ETFs and mutual funds that can suit your needs. You can find many ETFs and mutual funds that produce market returns (6-7% annually) to invest in. These are relatively safe investments.
Investing in Real Estate
When you first think of real estate investing, you probably think of purchasing a rental property to rent out. And that can certainly be the case but it doesn’t have to be that way.
While $100,000 might be enough to purchase an entire rental property, you could also consider a few alternatives.
You could invest your money into an REIT, or a Real Estate Investment Trust. In short, a REIT is a collection of real estate that is owned by a group of investors. You can think of it as a stock where the company owns rental properties.
The advantages of REITs is that they are typically well-diversified, limiting your risk to vacancy and nonpayment.
If you want to increase your earning potential, purchasing a full rental property might be the way to go. You can often finance a rental property, making $100,000 more than enough for a down payment.
You’ll need to coordinate how you will maintain the property and your relationship with tenants. You’ll also need to form a lease agreement detailing the dos and don’ts while the tenant occupies your space.
Investing in real estate can be as easy or as complex as you make it. If you’re looking to limit risk while increasing your diversification, investing in a REIT is a great choice. If you’re looking to increase returns and plan on holding real estate in the long term, purchasing a rental property might be a wise decision.
Investing in Bonds
Investing in bonds is a great way to increase your diversification while keeping your money more secure than investing in individual stocks.
There are two main forms of bonds: corporate and government.
Corporate bonds are offered by companies looking to raise capital to expand their business. Some of the top companies in the world will offer bonds to increase their cash reserves.
Similar to companies, the United States government also offers bonds, notes, and treasury bills. You can choose to invest your money for as little as two years or as long as 30 years.
Because of the relatively low risk that bonds provide, they typically offer suboptimal returns. You can expect to earn anywhere from 1-4% with more risky corporate bonds averaging slightly higher returns.
Store Money in a CD
A CD, or Certificate of Deposit, is similar to a high-interest savings account in some ways. It is a safe place to store your money while earning some interest.
The main difference? With a CD there is a specific time period in which your money cannot be withdrawn. This period can range anywhere from 21 days to over 10 years. In exchange, you typically receive anywhere between 1 to 2% annually.
Investing in Passive Income Streams
For those with full-time jobs, investing in passive income streams can be a great way to build wealth that requires little ongoing work.
There are hundreds of potential passive income streams but they all require an initial investment of either time or money (perhaps both).
Dividend investing is a common technique to build a growing passive income stream that requires no work to maintain. By purchasing stocks that offer dividends, you can use your dividends to acquire more stocks, exponentially growing your dividend income. While this method will take time to grow, it is perhaps the most simple and effective way to build wealth.
Other forms of passive income streams are:
- Affiliate marketing
- Renting out space in your home
- Renting your vehicle
- Stock photography
- Writing books
Cash is King
When trying to decide what to do with your $100,000, you might be tempted to invest or spend every penny.
This would be an extremely poor mistake. You should always keep cash on the sidelines in the case of new investments or an economic downturn.
This will allow you to make new investments or purchase more shares at a cheaper price if an economic downturn happens.
Don’t Forget About Taxes
Depending on how you obtained your money, you’ll need to consider the tax consequences.
If you obtained your money through gambling, you should allocate the appropriate amount to pay Uncle Sam when tax season arrives otherwise you could be left with an outrageous bill come April 15.
You’ll also want to consider the taxes on your investments. The money that you earn from your investment will be taxed one of two ways depending on the length you hold your investments.
If you hold your investments for less than one year, any earnings from that investment will be taxed at your ordinary income tax rate ranging from 10% to 37% (in 2020).
If you hold your investment for longer than one year, it will be taxed via long term capital gains rates ranging from 0 to 20% based on your income. As you can see, long term capital gains can be significantly cheaper than short term gains making holding your investments critical to saving money on taxes.
What not to do with 100k
Just as we mentioned several methods of investing your money, there are some things you should avoid at all costs.
Go on a spending spree
After receiving or noticing that you now have $100k, that will likely come with a rush of dopamine. You might be intrigued to “treat yourself” for your newly found money.
There’s nothing wrong with spending a small portion on yourself, but you should aim to keep your spending to a minimum. Even smaller purchases can quickly add up, limiting your ability to grow and keep your money.
Put all your eggs in one basket
You’ve probably heard the saying before that you shouldn’t put all of your eggs in one basket, and that’s true when it comes to managing your money.
You should spread your money out in the case that one of your investments fails. This will prevent you from losing your entire portfolio and instead you’ll lose only a portion.
If you feel that you are overwhelmed trying to manage your money, consider seeking the help of a financial advisor to help guide your decisions.
They should be capable of answering your most complex problems and offer solutions that fit your situation.
You should aim to find an advisor that is both trustworthy and experienced. You can look for feedback and reviews to help pick an advisor that is right for you.
Conclusion: Making Smart Money Decisions with 100k
Managing money can be difficult, especially when it’s a large amount like $100,000. When determining what to do with your cash, you need to first understand your goals and individual situation.
You should first find a safe place to store your money, like a high-interest savings account.
If you’re nearing retirement, you’ll want to choose a more conservative investment strategy. While those with a longer time to invest can be more risky.
It’s best to spread your money over various forms of investments to maximize your diversification and minimize risks.
To invest 100k, you should examine a mix of several options including stocks, bonds, real estate, and other investments to maximize your diversification and limit risk.
Have you received a windfall of some sort? How did you manage your money? Comment below!