Here is a problem that 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're assuming that your $100,000 of extra cash really is extra and that you do not have any outstanding debt, especially high-interest credit card debt. If you do have debt outstanding, then most finance professionals would say that your number-one priority for that chunk of change is to pay down your debt.
Once that is done, and if you already have some other assets in place—such as a viable retirement plan, an adequate emergency fund, and some other well-placed capital—then you're already ahead of the game. If so, then you probably know what some of your options are already. However, if you are new to investing, then you may want to start with some research.
In any case, there is no one "best way" to use this cash; there are many options. If in the face of these options, deciding what to do with $100,000 seems daunting and you become 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. Cited below are some of the best options for your cash that you might not have considered, or which you may want to reconsider.
- If you find yourself with so-called discretionary cash, first take care of the basics: pay off debt, set up or continue funding a retirement plan, and set aside an emergency fund.
- Next, consider paying off your mortgage or if you don't yet own property, buying a home.
- Additionally, taxable investments, such as stocks, bonds, mutual funds, and even CDs, are a good way to use your cash.
Although perhaps not the most exciting prospect, consider paying off your mortgage if you have one. If you do not own your home or another investment property, then do think about investing in real estate. Real estate can be a solid investment, but it is complicated; it requires that you do your due diligence.
You also can put your extra cash into taxable investments. The advantages are that when you decide to withdraw your cash, this money will be tax-free because the principal that you invested has already been taxed. However, any money earned on interest, capital gains, or an increase in the initial investment will be considered as taxable income.
Among the more common taxable investments are stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Some of these instruments, like dividend-paying stocks, could generate periodic income. This approach might be particularly attractive today, as dividends and long-term capital gains receive favorable tax treatment relative to earned income and ordinary interest income.
However, if you are squeamish about investing in the market and want to be completely safe, you can invest the money in high-yielding certificates of deposit (CDs) or in a high-interest savings account. As of 2021, the best rates for high-yield savings accounts are coming from the online platforms of various financial services firms whose names you might already know—such as Goldman Sachs, American Express, and Barclays Bank. You can even find some websites that will aggregate and compare the options for high-yield savings accounts for you.
Finally, if your pension plan is an individual retirement account (IRA) or a 401(k), both of which are tax-deductible but not tax-free, you could look into opening a Roth IRA account, as the money drawn during retirement from a Roth IRA is not taxed.
Diversify, Diversify, Diversify
Although an amount of money is a relative concept, $100,000 is a respectable enough sum to be able to apply the Investing 101 mantra of diversification. In other words, you may divide up the $100,000, putting a portion of it into vehicles that you already own, like your IRA, and trying some new investment tools with the balance. Deciding how to allocate this kind of extra capital involves weighing your options carefully, considering your short- 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.