Whether you inherit a windfall or have carefully tucked away money for years, you may be one of the 24% of millennials who has $100,000 saved. That’s a significant amount of money, and you might be worried about wasting it or putting it in the wrong place.
Having $100,000 socked away gives you lots of options to improve your financial future. If you’re not sure how to invest $100K, this guide will help you get started.
3 questions to ask yourself before you invest
Before you rush into investing your money, it’s important to understand why you’re investing and your risk tolerance. Take a step back and ask yourself the following questions.
What are your goals?
Not everyone has the same financial objectives, so think about what’s important to you. Perhaps you want to buy a home soon, retire early, or pay for your child’s college education. Those goals can help inform your investment plans. Keep in mind that there’s no one goal that’s right for everyone, so think about your priorities.
What’s your timeline?
Next, think about how quickly you want to achieve those goals. For short-term investment goals — meaning objectives you want to achieve within three to five years, such as saving for a down payment on a home — you may want to invest more conservatively to grow your money while trying to minimize risk. But for longer-term goals, like saving for retirement, you might consider investing more aggressively with the hope of earning higher returns. Although higher returns aren’t guaranteed, investing aggressively if you have a long time horizon may help you build your wealth over time.
What’s your risk tolerance?
The stock market can be scary. The market has natural ebbs and flows, so you can experience significant losses. If seeing the market dips gives you serious anxiety, you might want to invest in more conservative investment options. Typically, conservative options offer a lower rate of return, but fewer market fluctuations. By contrast, if you want to earn a high rate of return, investing in aggressive investment options may be a better strategy for you. It’s important to note that you won’t necessarily earn high returns by investing aggressively; it all depends on market performance and how you’ve chosen to invest.
How to invest $100k: 5 options
Once you’ve identified your goals and timeline, it’s time to come up with a smart investment plan. Below are five ways to make your $100,000 savings work harder for you.
1. Pay down your debt
Reducing your debt isn’t something you typically think about when it comes to investing, but eliminating your debt is a significant investment in your financial future. According to a recent survey, approximately 76% of millennials have debt, with the majority of borrowers reporting that they can’t achieve their goals because of it.
Whether you have student loans, medical bills, or credit card debt, high interest rates can be costly and cause your balances to grow. By getting out of debt, you can save more money over time than if you let the money sit in your bank account. For example, the average interest rate on credit cards is 16.43% (as of Dec. 9, 2020) — far higher than what your money can earn in interest in a savings account.
If you have high-interest debt, using your $100,000 to pay it down is a smart way to manage your money.
2. Build your emergency fund
Most Americans don’t have an adequate emergency fund and would have to borrow money to pay for a $400 unexpected expense. Not having a safety net leaves you at risk; if your car breaks down or you lose your job, you’ll be unable to pay your bills.
Financial experts generally recommend saving three to six months’ worth of expenses in an emergency fund. If you have job security and other assets, you may be fine with just three months’ worth of expenses. But if you work in a volatile industry, it might be wise to save six months’ worth of expenses or even more.
Make your money work even harder for you by depositing your emergency fund into one of the best savings accounts available. For instance, with a Chime or Aspiration online savings account, you could. earn a higher annual percentage yield (APY) than what you’d typically get with a traditional savings account, which may allow your money to grow faster.
Establishing a strong emergency fund can give you peace of mind that you’ll be able to weather unexpected hurdles when they inevitably come along.
3. Boost your retirement savings
If you’re like most people, you might be behind on your retirement savings. According to the Government Accountability Office, 48% of households headed by someone 55 and older had no retirement savings at all. If you’re wondering where to invest $100k, here are some options to save for retirement:
- 401(k) or 403(b): Some employers offer retirement accounts, including 401(k) or 403(b) plans. They may even match a portion of your contributions, which helps you save even more money for retirement. If you have an employer-sponsored retirement plan, take advantage of it and consider contributing up to the annual maximum. For 2021, the 403(b) and 401(k) contribution limit is $19,500. If you’re 55 or older, you can make catch-up contributions, adding an additional $6,500 per year to your retirement fund.
- IRA: An individual retirement account (IRA) is a retirement account you can open on your own. If you max out your 401(k) — or if your employer doesn’t offer one — you can use IRAs to save money for retirement. Anyone can open a traditional IRA. But if you meet certain income requirements, a Roth IRA might be a better option for you. With both IRA types, you can contribute up to $6,000 per year ($7,000 per year if you’re 50 or older).
4. Save for your children’s college education
If you have children, using some of your $100,000 savings to build their college fund can be an incredible gift, helping reduce their need for student loans later on. When it comes to saving for college, there are several investment options:
- 529 plans: With a 529 college savings plan, you can save for your child’s education and receive tax-free growth and tax-free withdrawals as long as the money is used for the beneficiary’s qualified education expenses.
- Coverdell accounts: With a Coverdell trust or custodial account, you can contribute up to $2,000 per year toward your child’s education. Distributions from the account are tax-free if they’re used for qualified education expenses.
- UGMA/UTMA: With a UGMA/UTMA (Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act) account, you invest on behalf of your child. Once your child reaches a certain age — 18 to 25, depending on the state — the money is transferred to the child to use as they wish. UGMA/UTMA accounts belong to the beneficiary and cannot be changed.
5. Invest in a taxable account
If you’ve paid off debt, established an emergency fund, and made the maximum contributions to your retirement fund and still have some of that original $100,000 left over, consider putting your money into a taxable investment account.
Taxable investment accounts don’t have the same advantages as 401(k) plans or IRAs — your contributions aren’t tax-deductible, and you’ll have to pay taxes on your returns — but there is a major benefit too. You can withdraw money from a taxable account for any purpose and at any time without paying a penalty.
To start investing, you need to open a brokerage account. The right brokerage account for you will depend on your needs and financial situation. Those that prefer a more hands-off approach to investing might opt for an account with one of the best robo-advisors. Robo-advisors typically offer relatively low fees and automated portfolio management. Essentially, these tools choose your investments for you based on your designated time horizon and risk tolerance. Some also offer convenient features like automatic portfolio rebalancing and tax-loss harvesting.
With a traditional brokerage account, you typically have more control over your investments than you would with a robo-advisor. This means you'll need to decide which investments make the most sense for you as well as how to maximize your tax efficiency. You may also be more likely to get access to financial planning advice from a human advisor through a traditional brokerage firm.
If you're unsure which option is best for you, you might consider a robo-advisor like Betterment that offers the option to get personalized financial advice from a human financial advisor.
You also need to decide what investment options make the most sense for you. Different investing platforms offer different options, which may include:
- Stocks: You can invest in individual companies by buying shares in stock. Individual stocks are one of the more volatile investment options, as your investment is solely dependent on the performance of a single company.
- Bonds: Companies and government agencies issue bonds to raise money for projects. Investors can purchase bonds and earn interest on their investment. Bonds tend to be one of the least-risky investment options, but they also have lower rates of return.
- Mutual funds: A mutual fund pools money from investors and invests in a group of securities, including stocks and bonds. Mutual funds allow you to instantly diversify your portfolio, as you can invest in hundreds of companies at once. However, mutual funds typically have relatively high investment minimums — most accounts have investment minimums of $1,000 and up.
- ETFs: As with mutual funds, exchange-traded funds (ETFs) allow you to invest in hundreds of stocks or bonds at once. But ETFs tend to have much lower investment minimums and lower fees.
Unless you’re a seasoned investor, you may want to consider mutual funds or ETFs rather than individual stocks or bonds. Mutual funds and ETFs provide instant diversification, and a diversified portfolio could potentially help to moderate your risk — though it’s important to remember that all investments come with the risk of loss.
FAQs about how to invest $100k
What is the best way to invest $100k?
There is no one-size-fits-all investment strategy for everyone. The best way to invest $100,000 depends on your current financial situation and goals. Depending on your needs, the most effective way to invest your money may be paying down debt. Or you may be better off investing for your retirement. In which case, you have several options, including putting money into a 401(k), IRA, or taxable account, or investing in alternative assets like real estate or artwork. To figure out which will work for you, think about your goals and your target timeline.
Should you keep $100k in the bank?
Although it’s a good idea to save three to six months’ worth of expenses in a bank account, if you have excess savings, you may want to consider investing it elsewhere.
To save for long-term goals, such as your retirement, investing in stocks, bonds, mutual funds, or ETFs may allow you to earn higher returns than if your money was in a savings account. However, it’s important to note that all investments come with the risk of loss. But by learning how to invest money, you can potentially grow your wealth over time, depending on your investments and market conditions.
Is $100k a lot of money?
By any standard, $100,000 is a lot of money. To put it in perspective, consider that the median U.S. household income was $68,703 in 2020. If you have $100,000 saved, that means you have 145% of the median income in the bank, which is a substantial amount of money.
The bottom line
When you have a large amount of money sitting in a savings account, figuring out how to invest $100K can be overwhelming. By thinking about your financial goals, risk tolerance, and target timeline, you can come up with a realistic investment plan that helps you reach your objectives. If you still have questions about the best types of investments for you, you could consider working with an investment advisor. The right advisor may be able to offer financial advice that allows you to invest more confidently.
Whether you use your money to pay down debt, bulk up your retirement nest egg, or invest in a taxable investment account, you’re setting yourself up for a more secure financial future.