How To Invest 100k - Your Life Lesson

How To Invest 100k - Your Life Lesson

In these past few decades, the popularity of personal finance has steadily been increasing. One major reason for such is that having a job is no longer enough to give you the financial growth and security you need.

Decades ago, you'll do okay if you get hired by an established company. You can expect to work for almost a lifetime in one company and also expect income growth at the same time. Because today's economic field moves faster and it's more competitive, you can't depend on a single company to keep your finances growing and secure. In this day and age, securing your personal finance is now your responsibility. This also means you need to know how to manage your finances and learn how to invest.

Because of such, questions like "If you have X amount of money, how would you invest it?" needs to be addressed more than ever before; which is why in this article, you'll discover how to obtain the best answer for the question - how to invest 100k?

Where Do You Want To Go

When planning on how to invest your 100K, the most crucial question is to ask is what's your overall goal. This is the part in which most people choke-up. For many, the usual answer is - my goal is to get as much money from it as I can. Such an answer is terrible since, in most cases, you have to work backward. This means you have to set a goal first and plan backward up to where you are right now.

So let's say your goal is to have $5,000 a month without doing anything. To get that, you'll need $60,000 a year. Assuming you have an investment vehicle that gives you 10% per annum, your overall lump sump need is $600,000. So the next question is, how to turn your $100,000 into $600,000. This might surprise you, but the answer to that question is not difficult. Unfortunately, there is the element of time, and it's the factor that complicates everything.

So here's an extreme example, how would you turn 100k into 600k with the time limit of 24 hours. Generally, the shorter the time limit, your options will get more limited, and your chances will get worse. So, in this case, perhaps your best option is to go to Las Vegas and hope you get lucky turning your 100k into 600k. However, let's look at another extreme.

When turning 100k into 600k with a limit of 100 years, your options are vast. In fact, you only need 2% annual interest plus compounding, and you'll be even over 600k after 100 years. Obviously, you don't have 100 years to compound the growth. And, hopefully, you don't need to turn 100k into 600k overnight. Hence, you'll need to figure out where you are in between the extreme examples mentioned above. So, how do you do that?

That's the easy part. You can just use any investment compound calculator. There are plenty to choose from, and most are free. The essential factors to input are your initial investment, annual return, and time limit.

By factoring in your monetary goal, time limit, and 100k, you can figure out how much annual rate of return you need. And, this is a big step. Because once you know how many annual returns you need, then it's a lot easier to choose the right investment vehicle.

Your Investment Vehicle Choices

In this day and age, the number of investment vehicles is almost endless. Thankfully, you are in a better position to filter out your choices because you already know the minimum annual returns you need. Having said that, investment vehicles that have consistently helped people achieve financial freedom includes:
 

* Stocks - these are paper assets that represent ownership of a company. Since mature companies will re-distribute their profits to owners of the stocks or known as shareholders, plenty of people want to own such paper assets. Also, since dividend-paying stocks are already relatively expensive, there's plenty of people who want to buy the stocks before a company reaches this phase to get it cheaper. Hence, there's a healthy trading industry for stocks, whether it's paying dividends or not.
 

* Bonds - bonds are just loans. If you hold a bond, it means someone is going to pay you a certain amount of money at regular intervals. Bonds are typically safer than stocks as you are nearly guaranteed to get returns. However, the growth potential of bonds is slower than stocks.
 

* Real Estate - there are plenty of wealthy people who made their money or parked their money in real estate. The beauty of the real estate is that the market is a lot easier to predict than stocks or bonds. Also, you have plenty of creative means to turn a bad deal into a good one. Real estate is not very liquid on the downside, meaning it's hard to turn your real estate asset into cash in a short period.
 

Last Tip

By now, you should have some of the building blocks for formulating an effective way of investing your 100k. However, one crucial factor that was missing above is inflation.

Every year, the buying power of your money reduces by a certain amount. This decrease in buying power is considered inflation. The reason why this factor is important is that it relates to your goal.

In the example above, if your goal is 600k, then the buying power of 600k today is not the same as the buying power 30 years from now. A simple way of counteracting this is to add the inflation rate to your minimum needed annual returns.

So let's say if you need 10% to reach 600k within your time limit, just add the inflation rate. So if the inflation rate is 5%, then you need at least a 15% yearly return on investment to have the same buying power of 600k by the time you reach your goal. While this method is not exact, it should be within the ballpark.