Thursday, 19 September 2019

7 Smart Ways to Invest $100K

7 Smart Ways to Invest $100K
08 Jan
1:08
woman holding jar with money in it
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Can you ever have too much money? Some people might say no, but once you’ve paid off your debt and created an emergency fund, what should be your next step for stashing additional funds? The answer may be investing, which has a potentially greater rate of return than leaving your money in a checking or savings account.

When choosing how to invest, it’s important to consider what you want your investments to do. Would you like them to be part of your retirement strategy, pay for your children’s education or just grow your wealth? How much time do you want to spend personally managing your investments? The answer to these questions will help you determine the right way to invest your money for your unique situation.

What’s your investment style?

Before you decide how to invest $100K, it’s a good idea to assess the level of risk you’re comfortable with and how much you know about investing. There is no “right” investment style, but knowing the best available options can help you plan your investment strategy.

DIY

A brokerage has a wealth of tools for new and experienced investors alike to assess strategies, track the market and work with brokers to create a portfolio. While DIY means you’ll choose your portfolio allocation, it doesn’t mean you’ll fly blind. Some online brokerages offer assisted portfolio management, where a broker gives you appropriate suggestions. Others may have referral services to fiduciary financial planners who can provide you with a robust assessment of your strategy and offer suggestions for how to balance your portfolio based on your financial goals.

Robo-advisor

A robo-advisor offers a customized portfolio using an algorithm based on your financial goals and risk tolerance. A robo-advisor may have lower fees than a traditional broker and offer options for retirement accounts, including rollover IRAs, Roth IRAs and solo 401(k)s. Some robo-advisors, such as Betterment, also have an option to connect with a human advisor (usually for an additional fee). A robo-advisor may be a good option if you’re looking for a low-touch way to manage an investment account or maintain a retirement account.

Hire a professional investment advisor

A professional investment advisor can help you determine the best strategy for how to invest $100K, which could be useful if you have multiple savings goals. For example, if you want to save for your retirement, save for your children’s education, and have an investment account you actively use to buy, sell and trade, an investment advisor can help you clarify your financial goals, allocate your assets and manage your portfolio.

If you’re planning to hire an investment advisor, it may make sense to look for a professional investment advisor who is a fiduciary. That means the advisor will offer the best investment advice for you. If the advisor is not a fiduciary, their advice must be “suitable” but not necessarily in the optimal interest of your financial goals. While brokers are not fiduciaries, many brokerages offer free referral programs to independent wealth managers. For example, TD Ameritrade offers a financial advisor referral program where existing clients get a free introduction to an independent registered investment advisor (RIA) to consult on portfolio goals.

7 smart ways to invest $100K

Whether you’ve saved $100K or received an inheritance, deciding how to use the money wisely can be challenging and overwhelming. Although there is no “right” decision, the best choice is one that takes your financial goals, current needs and even some “wants” into account. Here are seven ways to invest $100K.

1. Invest in yourself

Whether it’s a vacation, a new vehicle or a home renovation, you may want to invest in yourself. That also may mean making sure your insurance, including life insurance, is up to date. If you don’t have life insurance now, you may want to open a policy. While some life insurance policies (such as whole life) offer investment components, it may make sense to purchase a term policy and use the difference in another investment account that may have a greater rate of return.

2. Max out your retirement funds

Can you ever have too much money saved for retirement? Many financial experts would say no. If you have a 401(k) through your job, it makes sense to contribute the maximum amount your employer will match. If you can comfortably cover your day-to-day expenses from your paycheck, you should strive to maximize your 401(k) contributions and take advantage of your pretax dollars.

You also may wish to maximize contributions to a health savings account (if one is available to you) or explore opening a Roth IRA or traditional IRA. Your financial goals and current financial situation can play a part in determining the best option for you. For example, Roth and traditional IRAs both have contribution limits, and if your modified adjusted gross income (AGI) exceeds a certain threshold, you may be ineligible to open a Roth IRA.

3. Invest in index funds

Index funds have become buzzworthy, doubling their share of asset management dollars in the past decade. An index fund is a type of mutual fund passively managed to track or match the components of a particular market index. For example, the S&P 500 is an index of 500 of the largest U.S. companies. Your S&P 500 index fund portfolio — purchased through a brokerage — is passively managed and invested to replicate the performance of the entire index on the market. Index funds have lower fees than mutual funds since they’re not actively managed, and they can be a low-touch way to invest.

However, it’s important to note that index funds follow market performance and don’t handle downturns well. This can be a challenge if you have a short-term financial goal you hope to achieve with your investments, such as saving for a home purchase.

4. Invest in real estate

For many people, their home is their largest asset and single biggest purchase, so does it make sense to use a $100,000 windfall to pay off a mortgage or buy a rental property? That depends on a host of factors, including your risk tolerance. Prepaying a mortgage raises the equity you have in your home, but since interest rates for mortgages tend to be low, you likely will see a higher rate of return if you use those funds to invest in S&P 500 index funds, which have had an average annualized return of about 10% historically. For example, if the interest on your home loan is 5%, your rate of return for paying off your mortgage would be only 5%.

What about investing in a rental property? To answer this question, many people rely on “the 1% rule,” which states that a property’s monthly rental income should be greater than or equal to 1% of the purchase price. In other words, if a rental property costs $100,00, it should rent for at least $1,000 a month, excluding expenses associated with owning and managing the home.

5. Invest in education

According to a report by Vanguard, the cost of a college degree may be as much as $500,000 by 2035. If you have children, you may want to open an education savings account, such as a 529 plan. A 529 plan traditionally is used for higher education, but in 2018, 529 plans were expanded to allow up to $10,000 a year to be used for elementary or secondary school tuition. 529 plan earnings are not subject to federal taxes, which makes them a popular option for education savings.

You also may want to consider a more flexible education savings option, as money in a 529 plan will incur a penalty if it isn’t used for education expenses. You could open a custodial investment account, which you would control until the minor reached the age of 18. It’s important to note that a custodial investment account doesn’t have the same tax benefits as a 529 plan. In a custodial investment account, investment income past an initial $1,050 will be taxed at the child’s tax rate. Additionally, the custodian will incur a gift tax if the total annual contribution to the account exceeds $14,000 (or $28,000 if married filing jointly).

It’s smart to make sure you are comfortable with your retirement strategy first and then invest in an education fund as you’re able, as students can apply for financial aid.

6. Invest in individual stocks, IPOs or projects

If you’ve comfortably paid off your debt, are actively saving for retirement and have an emergency savings cushion, you may be comfortable with the risk that comes with investing in individual stocks, IPOs or emerging financial products like cryptocurrency. Alternatively, you may want to invest in a side hustle or use your money to personally invest in a relative’s business. These financial moves can be risky, so you may want to seek advice from a certified financial planner (CFP).

7. Save liquid funds in a high-yield savings account

If you’re trying to allocate investments, it may make sense to open a high-yield savings account. High-yield savings accounts generally are offered by online-only banks that don’t have the expense of maintaining brick-and-mortar locations. Unlike a traditional savings account — which may earn 1% or less in interest — many high-yield savings accounts (like those offered by Ally or Alliant Credit Union) offer interest rates of around 2%. Having access to liquid cash can make it easier to purchase stocks during a downturn without sacrificing the stocks you already have.

Determine your strategy and stick with your plan

Investing isn’t an all-or-nothing endeavor, and it may make sense to divide your money among a few different options. If you’re struggling to determine the smartest route for allocating your money, it may be a good idea to make an appointment with a financial advisor.

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Anna Davies
Anna Davies |

Anna Davies is a writer at MagnifyMoney. You can email Anna here

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