How to invest $100k
Whether you’ve been building a nest egg for years or just came into a lump sum, you’re likely looking for ways to maximize your savings and make your money work for you. Here are several ways that you might choose to invest $100,000.
Funds: Index funds, mutual funds, and ETFs
A mutual fund is a popular investment option in the US. If you invest in a mutual fund company, your money will be combined with that of other investors and placed in financial securities like stocks and bonds to increase in value over time. An exchange-traded fund, or ETF, is similar, but ETFs can be traded like stocks, while mutual funds can’t.
Historically, investing in a mutual fund has been more costly, as more mutual funds are managed actively rather than passively. Actively managed funds will always come at a higher cost since they attempt to beat the market. (Note: This gap is closing with time as more actively managed ETFs become available to invest in.)
An index fund is a type of mutual fund or ETF that is not usually actively managed and instead aims to track a market index and match its returns. Due to this, index funds often have a lower financial threshold for investment. Examples of commonly tracked indexes include the Russell 2000 Index and the Wilshire 5000 Total Market Index.
If you choose to invest in an index fund, you’ll get a broadly diversified selection of securities that lowers your overall exposure to financial risk. Index funds tend to outperform other types of mutual funds over more extended periods, and they’re perfect for beginners who want to increase the value of their savings and dip their toes into the investing pool.
Stocks: Invest in individual companies
Consider investing your $100k into stocks and shares if funds don’t suit. Stocks are financial securities that give you a percentage of a corporation’s ownership. Shares are individual units of stock. When a company goes public through an initial public offering (IPO), its shares become available for investors to buy and sell.
This usually occurs on stock exchanges like the New York Stock Exchange (NYSE). Once you own stocks, you can earn income from them in two different ways:
Dividends – A portion of earnings distributed to shareholders as cash or additional stock, usually every quarter.
Capital appreciation – An increase in your investment’s market price, making it saleable at a higher price.
Note that there are two types of stock – common and preferred. If you're a common shareholder, you’ll have voting power in meetings. If you’re a preferred shareholder, you won’t. Instead, you will have a higher claim on assets and earnings and be paid dividends before common shareholders.
While all investments come with a certain level of risk – it’s up to you to determine what risk level you’re comfortable with – stocks have historically outperformed most other investments in the long run, even accounting for variable market conditions.
Real estate: Buy property or invest in REITs
If you’re passionate about property, you might wonder whether this is a good place to invest your savings. The answer, most likely, is yes. Property is one of the most stable asset classes, making real estate investments some of the safest.
Even if you don’t have enough disposable income to purchase a property outright, either renovating and selling it for a profit or keeping hold of it and earning rental income as a landlord, real estate provides you with an abundance of investment options.
You can also choose to put your money in the safe hands of a real estate investment trust (REIT).
A REIT is a company that owns, operates, or finances income-generating real estate. If you have $100,000 and want to make a supported investment in the real estate industry, a REIT is likely your best bet.
REITs provide investors with a steady income stream, though they’re not the best choice if you’re concerned with maximizing your capital appreciation.
Savings accounts, MMAs, and CDs
Savings accounts are one of the most traditional and low-risk ways of investing your savings, but regular savings accounts don’t have the best interest rates. They’ll keep your money safe, but they won’t necessarily massively increase the total amount or make your $100k work as hard as it could elsewhere.
Money market accounts (MMAs) are a form of savings account with higher interest rates, but these rates come with more restrictions that you’ll need to account for or check that you’re happy with. According to the Federal Deposit Insurance Corporation (FDIC), as of 2022, the average MMA annual percentage yields 0.23 percent for accounts with balances under $100,000 (but this is variable and will rise and fall with inflation).
Another option to consider is a Certificate of Deposit (CD). For a set amount of time, your CD will earn interest on a lump sum that you’ve deposited – so it’s perfect if, for example, you’ve just come into an inheritance and you’d like to invest that money and watch it grow.
Bear in mind that financial penalties apply to CDs if you have to take money out before the set amount of time is over.
Things to consider before you invest $100k
Before you take the plunge and officially decide how to invest your $100k, it’s important to answer all the critical questions you need to and strongly consider your choices. Here are the answers to some common questions you might have:
How much interest can I earn on $100k?
It all depends on where you invest. Putting your money in a savings account is unlikely to get you a rate much above 2.5 percent. However, investing in something like stocks could earn you up to 8 percent interest annually.
Can I make a passive income with $100k?
Yes. Again, it all depends on how you spend it, but investing in something like a REIT (real estate investment trust) is one good way to guarantee a steady passive income stream.
Is $100k a lot of money in savings?
The average savings amount that a person needs to feel financially healthy is dependent on a number of factors including lifestyle, location, and age. Generation Z’s figure is just over $100,000, while the Baby Boomers’ is over $750,000. Regardless of where you stand, there’s a lot you can do with $100k in savings.
You should also ask yourself:
Am I keeping the level of risk down by diversifying my investments?
Have I done plenty of research?
Are my chosen investments aligned with my values and goals?
Do I have an emergency fund/am I over-investing with money that would be better spent on building that emergency fund?
Am I investing for the long term?
Am I making the most of my pension and ISA allowances?
If you’re still unsure of the shape your investment journey should take, working with a financial advisor is the best first step.
Iain is the Chief Product Officer at Unbiased.com.
Iain is the CPO at Unbiased.com. He has over 20 years of experience as a product leader building high-performing, cross-functional product teams that generate both customer and business value.