Here’s a problem most people would be happy to have: You suddenly find yourself with an extra $ 100,000 in discretionary cash on hand and you’re not sure what to do with it. The operative word here is discretionary. We assume that your $ 100,000 of extra cash is actually extra and that you don’t have any outstanding debt, especially high-interest credit card debt. If you have outstanding debt, most financial professionals would say that your number one priority for that change is paying off your debt.
With that done, and if you already have other assets in place, such as a viable retirement plan, an adequate emergency fund, and some other well-placed capital, then you are ahead of the game. If so, you probably already know what some of your options are. However, if you are new to investing, you may want to start with some research.
In any case, there is no “best way” to use this cash; there are many options. If faced with these options, deciding what to do with $ 100,000 seems overwhelming and becomes complacent, then you could be missing out on rewarding opportunities. As with any other financial decision, your job here is to choose the investment vehicle, or combination of vehicles, that is right for you. Here are some of the best options for your cash that you may not have considered or may want to reconsider.
- If you come across so-called discretionary cash, get to the basics first: pay off debt, establish or continue to fund a retirement plan, and set aside an emergency fund.
- Next, consider paying off your mortgage or, if you don’t already own a property, buying a home.
- Plus, taxable investments like stocks, bonds, mutual funds, and even CDs are a good way to use your cash.
Although it may not be the most exciting prospect, consider paying off your mortgage if you have one. If you don’t own your home or other investment property, then consider investing in real estate. Real estate can be a solid investment, but it is complicated; requires you to do your due diligence.
You can also put your extra money in taxable investments. The advantages are that when you decide to withdraw your cash, this money will be tax-free because the capital you invested has already been taxed. However, any money earned from interest, capital gains, or an increase in the initial investment will be considered taxable income.
Common taxable investments include stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Some of these instruments, such as dividend-paying stocks, could generate periodic income. This approach could be particularly attractive today, as long-term dividends and capital gains receive favorable tax treatment relative to earned income and ordinary interest income.
However, if you are hesitant to invest in the market and want to be completely safe, you can invest the money in high-yield certificates of deposit (CDs) or a high-interest savings account. Currently, the best rates for high-yield savings accounts come from the online platforms of several financial services companies whose names you may already know, such as Goldman Sachs, American Express, and Barclays Bank. You can even find some websites that will aggregate and compare high-yield savings account options for you.
Finally, if your pension plan is an Individual Retirement Account (IRA) or a 401 (k), both tax deductible but not tax-free, you might consider opening a Roth IRA, as money withdrawn during retirement from A Roth IRA is not taxable.
Diversify, diversify, diversify
Although an amount of money is a relative concept, $ 100,000 is a respectable enough sum that the Investing 101 mantra of diversification can be applied. In other words, you can split the $ 100,000, putting a portion of it into vehicles you already own, like your IRA, and trying out some new investment tools with the balance. Deciding how to allocate this type of additional capital involves carefully weighing your options, considering your short-term and long-term financial goals, and being realistic about your own tolerance for risk. As always, it is a good idea to seek the advice of a financial professional before investing.