One hundred thousand dollars used to be the benchmark. If you hit the six-figure threshold, you were living large, even in big cities. Amid a persistently high cost of living across much of the United States, $100,000 might not go as far as it used to — but it’s still a lot of money.
When you think about how to invest $100,000, it can be daunting. Lots of options and equal amounts of concern over making the wrong moves. The keys — take it step by step, don’t try to do too much and diversify.
Factors to consider before you invest $100,000
Pay down your debt and create an emergency fund
The main considerations before you invest $100,000 include several related factors, particularly how much and what type of debt you carry and whether or not you have an emergency fund. You might need to use some or all of your $100,000 to deal with these personal finance issues prior to investing in your money.
Most financial advisors suggest first paying down your high-interest debt and creating an emergency fund.
W. Cole Christian, a certified public accountant (CPA), certified financial planner (CFP) and senior wealth advisor and director of investments at Hightower Wealth Advisors in St. Louis gave us a nuanced view of the situation, explaining the textbook approach as well as a perspective that takes individual preferences into account.
He explained: “One of the primary considerations is the interest rate on the debt you’re holding. For example, if your debt is a 30-year mortgage that you locked in at 2.7% in 2021, there is not much urgency to forgo investing in favor of paying down this debt, since it’s so cheap. However, if the debt is something like credit card debt, where the interest rate can be 15%-plus, paying that down becomes an immediate priority.”
But, according to Christian, “Financial planning does not solely occur on a spreadsheet.” He acknowledged, “Some people emotionally do not like holding debt. So while the ‘spreadsheet’ may illustrate that ramping up their 2.7% mortgage payment is suboptimal, we cannot ignore the emotional and behavioral preferences of the client.”
Daniel Razvi, senior partner and COO at Higher Ground Financial Group, agreed that the type of debt you carry and having an emergency fund matters. However, after prioritizing an emergency fund, he said, “You should then make sure you are contributing enough to your employer 401(k) (Roth 401(k) is preferred) to get the full match they offer, because that is ‘free money.’”
From there, Razvi said, it makes sense “to look at what you could earn as a guaranteed interest rate (money market, certificate of deposit (CD), fixed annuity, etc.).” In the current environment of relatively safe 5% interest rates on the aforementioned products and others, Razvi said, it likely makes more sense to invest the money instead of paying down debt. He also noted that if your debt is a mortgage, he usually recommends not paying it off early, because once the house is paid off, that money is no longer earning anything.
“Home values will grow (or shrink) regardless of how much you owe; it is best to use excess cash to invest elsewhere, rather than in your house,” he added.
How to manage your investment (active or passive)
Once you get your debt and emergency fund situation settled, you might have to decide between an active or passive investment approach. There are a couple of ways to look at this.
First, do you want to take an active approach to how and where you invest your money? Do you want to do it yourself, hand the reins over to a human financial advisor or go the automated route with a robo-advisor? Of course, you can always opt for a mix of active and passive investment management now and at different life stages.
Second, consider your actual investments from an active or passive standpoint. Do you want to own ETFs or mutual funds that passively track a broad stock market index or opt for actively managed funds where a portfolio manager picks stocks around a specific theme or investing style? Will you decide to pick individual stocks yourself, something some financial advisors warn against, particularly for risk-averse, long-term investors?
Diversify your portfolio
The active or passive discussion ties directly to portfolio diversification. Ideally, investors strive for holdings across various asset classes (e.g., equities, bonds, cash) to help offset weakness in one area with strength in an uncorrelated area. This also means diversifying within asset classes.
If you own all technology stocks or all dividend-payers, your portfolio can suffer if one of these areas experiences downside. However, if you expose yourself to other sectors and types of stocks, this even spread helps absorb losses in one area thanks to gains in another.
A passive, broad market approach to ETF investing, for example, tends to achieve better diversification, simply because these funds provide access to large and diverse swaths of the domestic and global economy, something that’s much more difficult to do when you buy individual stocks.
Account for the capital gains tax
When you sell a stock, ETF or other asset for a profit, you might, depending on your income and filing status, need to pay capital gains tax. If you’re trading frequently amid an active, individual-stock-picking approach, you’re more likely to encounter this eventuality. That said, even long-term investors like to — and often should — take profits on winners. Realize that you’ll report capital gains annually when you file taxes and might be on the hook for as much as a 20% tax on your investment profits.
On the flip side, if you sell a stock or other asset for a loss, you might be able to deduct the capital loss at tax time. Many financial advisors and robo-advisors will monitor your positions for you and use a strategy called tax-loss harvesting to help you most effectively manage your capital gains tax situation.
Let’s use this insight as a backdrop to different approaches and specific strategies for investing $100,000 after you have a key element of your financial house in order. We’ll assume you have $100,000 that you’d like to invest in several different ways throughout the year across account types and assets in a quest for portfolio diversification.
6 approaches and strategies to invest $100,000
- Park your cash in an interest-bearing savings account
- Max out contributions to retirement accounts
- Invest in ETFs
- Buy bonds
- Consider alternative investments
- Invest in real estate
Park your cash in an interest-bearing savings account
Pursuant to our emergency fund discussion, an ideal place to park this cash is in a high-yield savings account. Many of these accounts currently pay interest rates in the neighborhood of the aforementioned 5%. This is superior to what you’ll get at most brick-and-mortar banks, making them ideal for whatever portion of your $100,000 you’d like to keep in cash.
Max out contributions to retirement accounts
Razvi stressed maxing out your 401(k), but not everyone has access to a workplace retirement plan. Depending on your situation, an individual retirement account (IRA) might be the only or better fit. After deciding if a traditional or Roth IRA (or both) makes sense, you can funnel up to $7,000 ($8,000 if you’re 50 or older) of your $100,000 into your IRA for the 2024 tax year and enjoy tax benefits, including tax-advantaged growth on your investment gains.
Invest in ETFs
Christian advised against buying individual stocks as you spread your money around. If a client comes to him with a portfolio heavily concentrated in individual stocks, he told us that one of the first orders of business is to move that money out of stocks and into ETFs to lower overall portfolio risk.
Buy bonds
Bonds can be confusing for even experienced investors. As an overall asset class, they’re generally less risky than stocks, but this doesn’t mean bonds are risk-free. The types of bonds you decide to buy will come down to your individual risk profile and the current interest rate environment.
With the Federal Reserve expected to cut the federal funds rate at some point in 2024, Charles Schwab recently suggested investors move from short-term bonds to longer-term bonds and bond funds.
Consider alternative investments
Alternative investments include everything from private equity to real estate to cryptocurrency. Some investments in the alternative space can be relatively risky and bound by fewer regulations, so proceed with caution. That said, many platforms dedicated to these types of alternative investments function similarly to brokerage accounts, making alternative investing more accessible than ever. You can even access these areas by buying stocks, ETFs and so-called fund of funds that specialize in private equity, real estate, crypto and other spaces.
Invest in real estate
With $100,000, you have enough money to make a hefty down payment or even buy property outright in the United States or other parts of the world.
What you use that real estate for is up to you.
Of course, you could buy a home to live in and consider it an investment. But you could also purchase a property, renovate and resell it.
Or if you’re looking to invest $100,000 for passive income, you might buy real estate and rent it out. While rental income is considered passive income, being a landlord often requires considerable work, which can make it feel like a more active endeavor.
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Consult with a financial advisor
No matter the paths you choose, it can’t hurt to hook up with a qualified financial advisor. The thought of having $100,000 can be anxiety-inducing for many people. The thought of losing some or all of it — even worse.
The National Association of Personal Financial Advisors (NAPFA) has an excellent tool to help you find financial advisors. From there, you can use the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck tool to check their credentials. Once you have it narrowed down, be sure to ask the right questions as you interview the professional who might take on the sacred task of helping you direct a cool $100,000.
Frequently asked questions (FAQs)
We listed quite a few in this guide. From traditional bank accounts to high-yield savings accounts and CDs to money market accounts, look for savings opportunities with FDIC insurance where you can harness the power of compound interest. While these options are technically saving, not investing vehicles, the compound interest component helps you grow your money meaningfully over time in the closest thing you can get to a risk-free environment.
If you’re maxing out your retirement accounts and committing to a buy-and-hold philosophy in your other long-term investments, you’re in a position to multiply your $100,000 exponentially, depending on the performance of your investments and the length of time you have until retirement.
Consult your financial advisor and/or tax person to discuss details of your situation. Generally, you’ll receive tax benefits in retirement accounts. While the tax break you receive varies by account type, one common benefit is tax-deferred growth of your investments. If you earn interest, collect dividends or realize capital gains (usually by selling a stock or other asset for a profit) outside of a retirement account, however, you’ll generally be on the hook for taxes, which vary based on the type of holding, how long you held your position, your tax bracket and other factors.
