Smart Investing Strategies For High Earners

If you're earning a six-figure salary, you may want to start thinking about how to invest your money. There are a few initial steps you should take before investing, such as paying off any high-interest debt and setting up an emergency fund. Once you've done that, you can start to think about what kind of investor you are and what your goals are.

Do you want to be actively involved with your investments, or would you prefer a low-cost online approach? Are you saving for a large expense, or for retirement? Do you need the money in five years or thirty?

When it comes to investing, there are a few different options to choose from. You could focus on growth industries and stocks, buy dividend stocks, exchange-traded funds (ETFs), or bonds. You could also invest in real estate, either by buying properties directly or by investing in a real estate investment trust (REIT).

It's important to diversify your portfolio and to minimize taxes and fees. You should also regularly review and rebalance your portfolio as market conditions change.

Remember, investing is a long-term game, and it's important to do your research and understand the risks involved.

Pay off high-interest debt

If you're earning a 100k salary, you're in a good position to start building long-term wealth. However, before you start investing, it's important to pay off any high-interest debt. Here's why:

The Cost of High-Interest Debt

High-interest debt is the most expensive type of debt for borrowers to carry. Credit cards, private student loans, and payday loans often come with some of the highest interest rates. The longer this type of debt is left unpaid, the quicker the costs grow, especially with compound interest. For example, credit card debt can accumulate quickly if you only make minimum payments, as the interest rates often exceed 20%.

Strategies for Paying Off High-Interest Debt

If you're dealing with high-interest debt, taking immediate action is advised. Here are some strategies to help you pay it off:

• Balance transfer credit cards: These cards allow you to transfer your unpaid balance to a new card with an introductory period of up to 21 months of interest-free payments. During this period, you can make a significant dent in your debt. Just be sure to have a plan to pay off the entire balance before the introductory period ends.
• Refinancing: If your credit score has improved since you took out a loan, you may be able to refinance with a lower interest rate and a new repayment term. This gives you more control over how quickly you want to pay off the loan.
• Debt consolidation: You can take out a new loan with a lower interest rate to pay off multiple high-interest debts. This simplifies your financial obligations and can reduce the amount of interest you pay.
• Negotiate lower interest rates: Call your creditors and negotiate lower interest rates. This can significantly lower your monthly payments and help you pay off your debt faster.
• Pay more than the minimum: Making only the minimum payments can keep you trapped in debt for longer. By paying two or three times the minimum, you can more quickly chip away at your debt.
• Use windfalls of cash: Put any extra money you receive, such as bonuses, raises, or tax refunds, towards your high-interest debt.
• Choose a debt payoff strategy: The "avalanche method" involves paying off balances with the highest interest first, while the "snowball method" focuses on paying off the smallest balances first for quick motivation. Alternatively, you can prioritize paying off the credit cards with the highest dollar balances, which can be motivational as you see those balances decrease.

Set up an emergency fund

Setting up an emergency fund is one of the first steps you can take to start saving and investing your $100,000 salary. An emergency fund is a reserve of cash that is specifically set aside for unplanned expenses or financial emergencies, such as car repairs, home repairs, medical bills, or a loss of income.

The amount you need for your emergency fund depends on your situation and expenses. Experts generally recommend saving three to six months' worth of living expenses in an emergency fund. This can be between $2,500 and $30,000, depending on your monthly expenses. For example, if you spend $5,000 per month, your first milestone could be $2,500 to cover short-term spending shocks, and your longer-term goal could be $15,000 to $30,000 to cover income shocks.

You can keep your emergency fund in a traditional savings account, or you could consider cash investments, which offer a low-risk alternative with the potential to earn more interest. Money market funds and cash management accounts are also options for your emergency fund.

By setting up an emergency fund, you can protect yourself from financial shocks and avoid making bad financial decisions or taking on debt. It can also help reduce stress and stop you from spending on a whim.

Diversify your portfolio

Diversifying your portfolio is a crucial step in achieving your financial goals. Here are some detailed instructions on how to diversify your portfolio when investing a $100,000 salary:

• Determine your risk tolerance: Before investing, it is important to understand how much risk you are willing to take. Different investments come with different levels of risk, so you should choose investments that align with your risk tolerance. If you have a low-risk tolerance, you may want to avoid volatile investments such as cryptocurrencies or high-growth AI companies.
• Allocate your investments across different asset classes: Spread your $100,000 across various asset classes, such as stocks, bonds, real estate, and peer-to-peer lending platforms. A suggested allocation could be 30% in rental properties, 30% in a diversified stock portfolio, 20% in bonds, 10% in peer-to-peer lending, and 10% in entrepreneurial ventures.
• Invest in a mix of growth and stable stocks: When building your stock portfolio, allocate your funds to both growth stocks and stable stocks. Growth stocks, such as those in the technology sector, offer higher potential returns but come with more volatility. Stable stocks, such as blue-chip stocks, provide more stability and steady growth.
• Consider dividend-paying stocks: Dividend-paying stocks provide a steady income stream while your investment grows. Proctor & Gamble (PG) is an example of a company that pays dividends.
• Invest in exchange-traded funds (ETFs) and index funds: ETFs and index funds offer built-in diversification and broad market exposure. They typically have lower fees than actively managed funds, making them attractive for long-term investors.
• Review and rebalance your portfolio regularly: Market conditions change over time, so it is important to review your portfolio periodically and make adjustments as needed. This may involve buying or selling investments to return your portfolio to your desired asset allocation.
• Consider tax implications: When diversifying your portfolio, remember to consider the tax implications of each investment type. For example, investments held for more than a year are typically taxed at the long-term capital gains tax rate, which is lower than the ordinary income tax rate.
• Seek professional advice: If you are new to investing or have a complex financial situation, consider seeking advice from a licensed financial advisor or broker. They can provide personalized recommendations and help you make informed investment decisions.

Maximise tax advantages

When investing on a 100k salary, it is important to maximise your tax advantages. Here are some strategies to do so:

Max Out Your Retirement Contributions

If you have access to an employer-sponsored retirement plan such as a 401(k) or 403(b), aim to contribute the maximum amount allowed. In 2024, the contribution limit for a 401(k) is $23,000, and it increases to $23,500 in 2025. If you are 50 or older, you can contribute an additional $7,500 as a catch-up contribution in 2024 and 2025. For those between 60 and 63 years old, the catch-up contribution further increases to $11,250.

Individual Retirement Accounts (IRAs)

Consider contributing to a Roth IRA or traditional IRA. While contributions to traditional IRAs are often tax-deductible, withdrawals in retirement are taxed as ordinary income. On the other hand, contributions to Roth IRAs are not deductible, but withdrawals in retirement are tax-free.

Health Savings Account (HSA)

If you are enrolled in your employer's high-deductible health insurance plan, you may be eligible to open a Health Savings Account (HSA). This account allows you to contribute pre-tax dollars to cover medical expenses. Any unused funds can be invested, and you won't pay taxes on withdrawals as long as they are used for eligible healthcare expenses.

Taxable Investment Accounts

After maxing out your 401(k) and HSA, consider contributing to a taxable brokerage account. While you will be investing with after-tax dollars, taxable accounts offer some advantages that qualified accounts do not. For example, you can withdraw your money penalty-free before the age of 59 1/2, which can be helpful if you plan to retire early. Additionally, gains on investments held for over a year within taxable accounts are typically taxed at the capital gains tax rate, which is lower than the ordinary income tax rate.

Backdoor Roth Conversions

If your income exceeds the limits for contributing to a Roth IRA directly, you can still take advantage of the benefits of a Roth account through a backdoor Roth conversion. This involves first making a non-deductible contribution to a traditional IRA, and then converting it to a Roth IRA in a non-taxable Roth conversion.

Engage in Regular Tax Planning

Proactive tax planning can help minimise your tax burden today and in the future. This includes recognising taxable income at more favourable tax rates, aligning deductions with high-income years, and ensuring your withholdings are set up appropriately to avoid underpayment penalties.

Invest in growth industries

If you have a $100k salary and are looking to invest in growth industries, you should consider focusing on sectors that are expanding rapidly and are expected to continue doing so in the future. Here are some options:

Cloud Computing

Cloud computing has been experiencing significant growth due to the increasing demand for digital transformation and the need for remote data storage and processing power. Companies in this sector, such as Amazon Web Services (AWS), Microsoft Azure, and Google Cloud, have been steadily growing and are expected to continue their dominance in the market.

E-commerce

The rise of online shopping has propelled the e-commerce industry to new heights. Companies like Amazon, Shopify, and Alibaba have revolutionized the way consumers shop, and the industry is expected to continue its upward trajectory.

Financial Technology (Fintech)

Fintech companies are leveraging technology to disrupt traditional financial services. This includes mobile payment systems, online lending platforms, robo-advisory services, and blockchain technology. Companies like PayPal, Square, and SoFi have been at the forefront of this growth.

Healthcare

The healthcare industry, particularly with the advancements in technology, is another sector that has been experiencing rapid growth. This includes developments in pharmaceuticals, medical devices, telemedicine, and digital health solutions. Companies like Johnson & Johnson, UnitedHealth Group, and Teladoc Health are worth considering.

Technology

The technology sector as a whole is an attractive growth industry. Innovations in areas such as artificial intelligence, virtual reality, and the Internet of Things (IoT) are driving progress across various industries. Tech giants like Microsoft, Apple, and Google have been steadily growing for decades and are expected to continue their dominance.

When investing in growth industries, it is important to remember that these sectors may experience higher volatility due to their rapid growth. Therefore, conducting thorough research and diversifying your portfolio across multiple industries is crucial. Additionally, consider seeking advice from a financial professional to ensure that your investment strategy aligns with your risk tolerance and financial goals.

Frequently asked questions