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The idea of having $100,000 to invest may seem far off for some, but it could happen sooner than you think.

You might get a raise at work, increase your savings rate for a few years, sell a house or business, or receive a large inheritance. More likely, you’ll save slowly but steadily over time to get $100,000 to invest.

But once you get there, how exactly should you invest it?

Congratulations, You’re Ready to Invest $100,000 When…

Before you decide to invest $100,000, make sure you’re all set in these financial areas.

You Have an Emergency Fund

Before you invest, you should always have an emergency fund. An emergency fund is a pool of money you can tap into when a financial emergency arises. You should have at least three to six months of living expenses set aside. Your emergency fund should be in a place where you can access it quickly if you need to, such as a and invested in a high-yield savings account.

Your Debts are Paid Off

Be sure to pay off your high-interest debts before you start investing. It doesn’t make sense to put your money into an investment that earns 5% when you have credit card debt charging you 15% interest, not including fees. Get rid of any credit card balances and other high-interest debt before you invest your $100,000.

You’ve Squared Away Taxes

Before you invest $100,000, evaluate the tax benefits of putting that money into an IRA or 401(k). These types of retirement accounts offer tax benefits, so it’s a good idea to contribute money to one or both if you haven’t already.

IRA Tax Benefits

There are two types of IRAs: Traditional and Roth. Traditional IRA contributions are tax deductible up to certain limits. You don’t pay taxes until you withdraw the money later on.

Contributions to a Roth IRA are not tax deductible. However, qualified distributions from the account are tax-free.

401(k) Tax Benefits

Contributions to a 401(k) plan are considered “pre-tax” income. If you contribute $1,000 to a 401(k), you lower your taxable income by that amount. You’ll pay taxes on your 401(k) when you withdraw the funds.

7 Ways to Invest $100,000

There are plenty of options for how to invest $100,000. To choose the best route, think about what type of investor you are. How much risk are you comfortable with? Do you like to be hands-on or would you prefer an automated investment strategy?

After you’ve thought about these questions, here are eight ways to make that money work for you.

1. Robo Advisors

Investment apps are a convenient way to invest, especially for beginners. The best investment apps are easy to use and help you get started quickly.

Each app offers unique functionality. Some robo advisors will automatically invest and rebalance your portfolio, while others allow you to do your own research. Some apps offer special features, like investing your spare change or targeting sustainable investments. Pay close attention to the fees associated with each robo advisor or app before deciding where to invest your money.

2. Real Estate

If you’re interested in real estate investments, such as your own rental property, be sure to do your research and speak with people who earn extra income this way. If you want to invest in real estate without buying a whole building, check out a crowdsourced real estate investment tool like Fundrise.

Fundrise allows members to invest in commercial properties, rental housing or residential development. You can start investing for as little as $500, significantly less than the tens of thousands it would take to buy a property on your own.

3. Peer to Peer Lending

With traditional lending, your deposited money is used by the bank to fund their own lending programs. Peer to peer lending cuts out the bank, connecting you directly with people who want to borrow money.

By becoming a lender yourself, you could end up making higher returns than you would via traditional methods – although this is far from a guarantee. Lending Club, a peer to peer lending platform, has historically averaged a 4% – 6% return.

Be aware that this investment carries risk. Make sure you know what happens to your money if one of your borrowers defaults on the loan.

4. Stock Market

If you have $100,000 to invest, one option is to buy stocks. A stock is a small piece of ownership in a company. You can make a return on stocks in two ways. The first is by receiving a dividend, or a distribution that the company makes to the shareholders. The second is by selling the stock when the price has risen from your initial purchase price.

Although you can potentially make high returns on stocks, they can also be very risky. Dividend payments aren’t guaranteed, and stock prices can fall quickly when there is bad news about the company’s performance. That’s why many financial experts caution against investing only in individual stocks.

5. Bonds

A bond is an agreement to lend money to a company, with a fixed repayment schedule. If you own a bond, you’ll receive the scheduled payments. A bond can also be bought and sold on the open market.

Returns on bonds are typically lower because bonds are less risky. Bonds have a specified repayment schedule and interest amount, so they have more reliable returns.

It is possible, while unlikely, that a company can default on a bond, so there is some risk to be aware of. Still, bonds are considered less risky than stocks and can be an important source of stability in your portfolio.

6. ETFs

An ETF, or exchange-traded fund, is a collection of stocks, bonds, commodities, and other investment instruments. If you want to invest in a diverse portfolio without doing the research and balancing on your own, ETFs are a strong option.

The fund manager may change the makeup of the fund day to day to take advantage of market conditions. Individual investors can buy or sell shares of the fund on the open market.

7. Mutual Funds

Mutual funds offer a lot of advantages for investors. Like an ETF, a mutual fund is a diverse group of assets maintained by a fund manager. Unlike ETFs, mutual funds are not traded on the market. Instead, you buy a mutual fund by buying into the fund via a brokerage firm. Mutual funds can also offer certain other advantages over ETFs, like automatic reinvestment of dividends.

See Also: 6 Common Pieces of Financial “Advice” That May Actually Be Hurting You

Understanding Diversification and Risk

Before you invest $100,000, it’s important to understand two key concepts: diversifying your investments and deciding what level of risk you want to take on. You’ve probably heard these terms mentioned frequently, but what exactly do they mean?

Diagram showing the difference between diversification and risk

Diversify Investments

Investment diversification means having many different types of investments. This includes investing in different industries and investment vehicles. Diversifying your portfolio ensures that you won’t be affected as strongly by trends in specific industries. Pick a selection of stocks, bonds, funds and other types of investments to make sure you face less risk.

Risk Factors

When you’re investing $100,000, it’s also important to decide how much risk you’re willing to take on. Risk refers to the likelihood of losing money and the amount of money you could potentially lose.

Different types of industries and investment instruments are considered more or less risky, and there are different types of risk. Business risk refers to the potential for a negative event at the company you’re invested in. This could cause the company’s stock price to fall or the company might fail to repay a bond.

You should consider the overall risk of your portfolio allocation. Generally, younger investors can take on more risk and older investors should take a more conservative approach. If you invest in commodities, like oil, political risk may also be an issue.

In sum, you should have a wide variety of investments at a risk tolerance you’re comfortable with.

Investing Your First $100,000

Ultimately, whether you’ve sold a business, received an inheritance or saved your money bit by bit, it’s important to be smart when you’re investing $100,000. Don’t be daunted by the different options. Meet with a financial planner or use a robo-advisor if you aren’t sure how to invest. If you plan and invest wisely, you can use this as a step towards meeting your financial goals.

Author

Cat is the go-to personal finance expert for educated, aspirational moms who want to recapture their life passions, earn more, reach their goals, and take on a more active financial role in their families. Cat was named the Best Contributor/Freelancer for Personal Finance in 2014, and over the past few years her writing and financial expertise have been featured in dozens of notable publications like The Wall Street Journal, Yahoo! Finance, U.S. News and World Report, and many more.

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