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Hard work and a good job can make a person create wealth but the wealth gap between the people who are earning to become wealthy and those who have received funds through inheritance is very high.
People who are without any wealth face housing insecurity and pay higher rentals. Wealth management at an early age helps in saving for the future; hence, one should cautiously invest their earnings into secure options.
Investment is not about a random selection of vehicles. One should be able to evaluate the pros and cons of every option and do complete research or get advice from experts to buy the most suitable financial products for personal requirements.
Average middle-class wealth in developed countries
As per statistics, middle-class American family owns, on an average, about $11,700. So if one gets $100K they can invest in multiple ways where one of the most popular traditional ways of investing is in low-cost mutual funds and ETFs.
In the UK, 50 percent of the population holds less than 100K. As per a report on the poorest to richest 40% have less than 50K, and the average London adult family owns 87,000. Most of the older generation acquire wealth through inheritance.
Inheritance has doubled in the last 20 years and it is expected to increase where the wealthier will pass off their earnings to the children at the time of retirement.
The millennial in the age from 19 to 38 may cause the next inheritance boom but they need to invest their earnings properly to be able to provide it to their next generations.
To start, one should first determine the goals where you find out ways to invest for feel- good, saving or to buy a superior asset class. Most young professionals are ready to take higher risks and are very aggressive in their approach with investment, where the advisors may recommend diversifying equity portfolio.
The investment portfolio may include large, mid-cap or small-cap stocks that can be international, ETFs or low-cost mutual funds.
It is advised to put some money for education and fun. It can be a great idea to invest in education or some training which can help to grow internally. People who get a good amount of money in middle age can invest in pursuing an educational degree which can help their career grow.
It can be very hard to get a large sum of money at one time but if you get a lottery or financial aid, it is suggested to spend some of it on vacations and fun, or do upgrade of the house.
Experts advise investing in property to ensure long term gains through rental and appraisals, or if you are not ready to take responsibility for the asset, you can put money in REITs.
With all the extra funds, you are advised to save money for retirement, even in condition, when they own a strong retirement plan.
As the severity of COVID 19 set in, the stock markets plunged into the bear territory. This was not the case in the last year. It is necessary to adopt a dollar-cost averaging strategy to allocate money while investing, where you stop in a certain intervals to handle market volatility. Most of us who earn a lot do not have the right knowledge to invest in a smart way to avoid a loss and save for difficult times.
Most new workers are not aware of the methods that can be adopted to handle risks at the time of considering investing in funds. Many financial planners can help to identify the appropriate areas to put money to accomplish a passive and diversified portfolio that can grow in the subsequent years.
The first step is to identify your income/liabilities, earning potential and the overall financial goals. You need to calculate the risk tolerance and risk capacity where you need to see if you can accept a higher level of loss.
Higher earning stock options are often associated with higher risks. Instead of choosing and buying individual stocks, index funds can be used that track the indexes like the S&P 500. It tracks the top 500 US companies like Microsoft, Google, and ExxonMobil. It is considered difficult for average do-it-yourself investors to beat the index fund performance.
One can invest in the mutual fund or exchange-traded funds ETFs which provides an option to set and forget, and get an average annual return rate up to 7% after inflation.
Gold and precious metals like platinum and silver are considered attractive to some investors, who find it a useful hedge against the debasement of currency like the dollar. Such metals have been valuable for the millennia and its value continues to increase in the markets.
The trade of gold is not correlated to the security market and hence, it retains the value even when the markets are going down. The central banks are printing so much money and loading the economies with paper money which makes gold better than cash.
There are certain retirement accounts like the 401(K) or the individual retirement account like IRA where you can save through automatic contribution through the paycheck before taxes.
One can make use of the investment calculator and other tools to estimate how average investors convert $100K into over a million dollar.
Some experts can guide you to buy into the moment best investment that promises lucrative returns in a short duration like bitcoins where the investors are attracted to the positive outcomes but they may fail to see the risks.
It is best advised to adopt strategies to balance into certain safe options to avoid a loss even in the case when a risky option fails.
Do-it-yourself investors have a hands-on approach and they manage their portfolio where they conduct research and determine where to put the money. Such methods can help the them to choose exactly what they want. They determine the stocks, bonds, mutual funds, ETFs and other assets on their own.
Some use Robo advice or automatic systems that can help to manage the portfolio. It provides a low-cost hassle-free customized solution.
One can hire a professional agency to handle the portfolio where you get recommendations from the experts to manage portfolio which is based on the market trends and it is also based on the overall financial planning made by the investor for the future.
It is advised to invest asset wise for both short and longer window to grow investment to $1 million and it is important to have a mindful approach if you are considering real estate. The method adopted to allocate to real estate depends on your preference to have an active or passive strategy, or you can opt to spend in multiple options and rebalance periodically to ensure the asset allocation meets the predetermined goals.
The real estate sector involves traditional sector, REITs, and crowdfunding where you need to determine the risks, demand, challenges and other factors as per individual circumstances to calculate the earnings. There are many options like raw land, commercial/hotels / individual real estate, rental property, crowdfunding, businesses and stocks.
Traditional real estate involves investing in buy to let or buying commercial property, fixing it up, and selling/or renting it for profit / or monthly income, or one can generate income by flipping a house.
The traditional house can be a single-family home or holiday home or an apartment or other type of property, which is purchased in the right market to generate a monthly income to cover the mortgage.
It is best advised to buy a house that has a low cost of maintenance, is located in a good area and has higher chances of value appreciation.
Instead of investing in property, one can also buy the REITs to earn passive income.
There are other options like ETFs where one can buy into multiple real estate stocks and as the market fluctuates, you are benefitted from the growth in the sector.
It can offset the losses in other sectors as it spreads risk across multiple options.
Some investors prefer to invest through crowdfunding where one can pool the money to participate in starting some huge real estate projects. The investors earn when the project is completed and generates income.
To invest wisely determine a roadmap where you carefully analyze the various points. You assess your starting point and take into account the debts and your other financial obligations, and then you determine the time and design a retirement plan.
Risk tolerance and risk capacity are two factors which should be determined. Those who are comfortable with risks can invest in certain ventures offering huge returns for risks, and those who want to get secure plans can opt for cash, bonds or certificates of deposit. Most such low-risk strategies have a lower rate of earning (3 to 7 per cent).
Investment in stocks in small-cap companies has a higher potential for growth. But one should be ready to accept the volatility that is part of the market.
When you know you risk appetite, the next step is to create a plan to get the $1 million like how much can be added through your earnings monthly and how long you will be spending on it.
Then you can calculate the average rate of return of the all such diversified sectors to compare the best ones. One can use a calculator to find the plan to get the desired amount at the time of retirement. One can make use of a combination of diligent savings and receiving the inheritance windfall to devise the strategy.
It is necessary to balance the portfolio regularly where you determine the best allocations, in terms of, risk tolerance, time horizon and goals. One can adjust the platform automatically to stay updated as per changing market conditions.
It is best advised to approach the method where the overall fees, taxes and cost of ownership are low.
You should understand the terms like the expense ratio for mutual funds and ETFs. You should know about the trading fees and the fees that are linked to the individual stocks. You need to add the asset management fees charged by the financial advisors to the overall expense.
You should try to identify the areas to determine the taxable brokerage account verses the tax-advantaged retirement accounts and know how long to hold the investment. In a tax-advantaged account like the 401(K) or IRA, the investor is deferring the taxes until withdrawals are made at the time of retirement. Such an option can allow for tax-free distribution at the time of retirement.
In the case of taxable accounts, one may have to make a short term or long term capital gains tax on the gains made and it applies for investments that are held for more than a year.
Another way is to use the tax loss harvesting is to sell off the stocks at a loss to regulate the losses.
Best way to invest 100k for income
In the last few years, the global central banks are pumping huge money into the economy and there is extreme liquidity, which means, one can get significant returns only by investing in some of the major stock indexes. Buying stocks of large growing firms is a great idea but one should make the investment cautiously and chose the indexes that are less volatile as many indexes can undergo a higher degree of volatility and those who want to look for newer options to diversify, should be aware of the risks of diversification into the unknown sectors or indexes.
Emerging markets have been performing positively in the last few years but Brazil faces a lot of uncertainties as the country are trapped in a state of mediocre growth. Brazil is the place where one can make short term allocations in certain growing funds or companies like the Vale (iron – ore) or JBS (meatpacker).
In the long run, both Brazil and Mexico have dedicated growth outlooks as compared to Asia, and such economies face a lot of volatility in the political, institutional and educational sectors.
Some investment firms place a lot of emphasis on bonds, funds and stocks where a proper selection can help to achieve the desired financial objectives like investing in upcoming growing technical B2B firms or software companies. The digital-first economies and sectors like live commerce, live streaming, influencer marketing, food delivery, digital health, education and gaming are the emerging sectors where one can expect to get higher returns through strong growth.
In the COVID -19 situations, there has been growth in eCommerce and online shopping and more buyers entered the virtual market as the regular shopping centres were closed or had to follow social distancing.
Currently, the Federal Reserve is aggressively buying fixed income securities and keeping the yields low but the Fed cannot buy all. They will buy the investment-grade securities and many such options have unusual return potential but it can come with a huge risk factor.
Some investors may be forced to sell under constraints the asset-backed bonds, the real estate and structured debts, the various types of options, which are not investment-grade securities.
There are some unusual investments like buying an island, or forests, or power generation units like windmills, that are held by the hedge funds or REITs or high net worth individuals/ firms, are mostly backed by government schemes, or are based on extensive research of the financial planners.
It depends on your goals where you need to determine if you want the money to grow in the manner like -
Long term or short term
Low risk or high risk
For retirement earning or to get monthly income
Backed by government scheme / taxable / non-taxable
Environment-friendly or social cause or profit-based
Best way to invest 100k for income include combination of the following options -
Stocks offer one of the most attractive options where one can perceive the value of the option and check the future earning potential to determine the choice. It is advised to diversify in multiple sectors to avoid a loss.
Commodities like gold, silver, agricultural products offers options to diversify.
There are many types of government bonds which are offered and insured by the local government and one gets income through the interests paid on the bonds by the government.
There are many other types of bonds issued by the corporation, municipalities and countries that can be a risky (or low-risk option), but can offer a low return rate.
There are certain offers like P2P lending which provides strong returns, passive income and it also helps borrowers who need a loan. Such newer options are offered online.
One can invest in a saving or bank deposit or money market account, where you are offered a guarantee by the financial organization or the bank, and you get the option to access the money anytime.
To identify the areas to invest, one should first set the financial goals. Identify if you want to grow the retirement accounts or you are just looking to set up a college fund for your children. You may want to invest in a home or flat to earn monthly rental.
You need to determine the area where you want to put your money and then the timeframe of holding it.
The markets offer options like gold, diamonds, real estate, coins and antiques, which are often associated with luxury investment or into charitable donations. There are certain other unusual ways to invest like in environment-friendly projects, wine plantation / production, Brazilian art or restoring antiques like cars and other items.
The investors should know the risk factors and compare it to their liabilities and earnings to ensure they do not face financial issues, in case they are forced to put money in certain investment options for more than expected time.
Putting money in stocks or equities can offer short term best investment strategy but if the market fluctuates and if the value declines due to certain market factors, you may find it difficult to sell it at desired rates. Sometimes, investors are forced to sell at a lower rate, even while holding the stock for many years.
Stocks markets are highly volatility and can change erratically in a day from extreme highs to lows. Global risks like COVID 19 pandemic can create situations where you need expert advice to park your funds.
An average US government bond can give up to 3 per cent yield.
In the US such deposits or FDIC are insured and have a low return up to 1 per cent but are considered the safest accessible saving method.
Certificate of deposits provides yield up to 3 per cent and have a low risk but the investors' do not get access to the fund for 5 years (depending on the term).
Carefully diversifying into stocks, real estate and other options can get an average of 7 per cent yield.
The process where one investor puts all the money at once is called investing a lump sum.
Some researches finds investing all the money at the beginning and then splitting the fund over other months and years can be the best investment strategy but considering the case when the market crashes immediately after investing the lump sum, it is advised to diversify and invest in government bonds or other low-risk options to avoid a complete loss.
It is advised to follow a splitting strategy where one adopts the dollar cost averaging technique to identify the risk.
Also, psychologically it is not easy to invest all at once as one fears the loss. It is advised to have the investing experience to avoid the psychological impact in case of a loss.
It is not impossible to earn $1 million with $100K investment, many financial planners provide a selection of diversified stocks and the best investment options, where the risks are low and one can start into a low cost regularly managed fund to get a secure outcome. The average interest rate is in the range of 5 to 7 per cent but it depends on many factors.
Real estate monthly earnings and certain stock options can get higher rate up to 12 percent, and government bonds and CPDs can get a lower rate up to 3 percent.
You need to determine the amount and time that you can afford to expend. For 100k investment, you will have to put $155 a month for 30 years and shorter duration, you can put money for 25 years and in such cases per month, a contribution can be $530 a month. For getting the same in 20 years, you will have to contribute $1,150 per month.
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