How to Invest Money in 5 Steps

Start investing by giving your money a goal, deciding how much help you want, picking an investing account and choosing investments.
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Nerdy takeaways
  • How you invest money is personal and unique to your risk tolerance and investment timeline.

  • First, open an investment account based on whether you are investing for retirement, education, a kid or another goal.

  • Select investments—such as stocks, bonds, funds or real estate—that match your risk tolerance.

  • Minimize your exposure to risk by spreading your money across a range of asset classes.

Investing money in the stock market is one of the main ways to build wealth and save for long-term goals such as retirement. But figuring out the best strategy to invest that money can feel daunting. That doesn't need to be the case, though — there are several straightforward, beginner-friendly ways to invest.

Investing money is personal

Everyone has a unique financial situation. The best way to invest depends on your personal preferences and financial circumstances.

Here's a five-step process that can help you figure out how to invest your money right now:

Here’s how to put your cash to work right away.

» Ready to start investing? Read about the best investments right now

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How to invest money

1. Give your money a goal

Figuring out how to invest money starts with determining your investing goals, when you need or want to achieve them and your comfort level with risk for each goal.

  • Long-term goals: These goals are at least five years away. One common goal is retirement, but you may also have others: Do you want a down payment on a house or college tuition? To purchase your dream vacation home or go on an anniversary trip in 10 years? If so, check out our guide to long-term investments.

  • Short-term goals: These goals are less than five years away. They could be next summer's vacation, a house you want to buy next year, an emergency fund or your holiday piggy bank. Money for short-term goals generally shouldn't be invested at all. If you need the money you're saving in under five years, check out our guide to investing money for short-term goals.

In this article, we'll focus largely on investing for long-term goals and touch on how to invest without a specific goal in mind. After all, growing your money is a fine goal by itself. If you've come into a windfall, or are simply unsure of the right amount to get started, learn more about your options:

2. Decide how much help you want

Once you know your goals, you can dive into the specifics of how to invest (from picking the type of account to the best place to open an account to choosing investment vehicles). But if the DIY route doesn't sound like it'll be your cup of tea, no worries.

Many savers prefer having someone invest their money for them. While that used to be a pricey proposition, nowadays, it may be surprisingly affordable to hire professional help thanks to the advent of automated portfolio management services, a.k.a. robo-advisors.

These online advisors use computer algorithms and advanced software to build and manage a client’s investment portfolio, offering everything from automatic rebalancing to tax optimization and even access to human help when you need it.

If you'd rather do it yourself, continue reading — we'll take you through the steps.

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3. Pick an investment account

You'll need an investment account to buy most investments, including stocks and bonds. Just as there are a number of bank accounts for different purposes — checking, savings, money market, certificates of deposit — there are a handful of investment accounts to know about.

Some accounts offer tax advantages if you invest for a specific purpose, like retirement. Keep in mind that you may be taxed or penalized if you pull your money out early or for a reason not considered qualified by the plan rules. Other accounts are general purpose and should be used for goals unrelated to retirement — that dream vacation home, the boat to go with it or simply a vacation, period. Here's a list of some of the most popular investing accounts.

If you're investing for retirement:

  • 401(k): You might already have a 401(k), which many employers offer and takes contributions from your paycheck. Many companies will match your contributions up to a limit — if yours does, you should contribute at least enough to earn that match before investing elsewhere.

  • Traditional or Roth IRA: If you're already contributing to a 401(k) or don't have one, you can open an individual retirement account. In a traditional IRA, your contributions are tax-deductible, but retirement distributions are taxed as ordinary income. A Roth IRA is a cousin of the traditional version, with the opposite tax treatment: Contributions are made after tax and do not offer upfront tax-deductibility, but the money grows tax-free and distributions in retirement are not taxed. There are also retirement accounts specifically designed for self-employed people.

» View our roundup of the best IRA providers

If you're investing for another goal:

  • Taxable account: Sometimes called brokerage or nonqualified accounts, these are flexible investment accounts not earmarked for any specific purpose. Unlike retirement accounts, there are no rules on contribution amounts, and you can take money out at any time. These accounts don't have tax deductibility, but if you're saving for retirement and you've maxed out the above options, you can continue saving in a taxable account.

  • Custodial account: Also called UGMAs and UTMAs, these types of brokerage accounts can be used to transfer generational wealth. Custodial accounts allow an adult (such as a parent or guardian) to save and invest on behalf of a minor child. ABLE accounts are a specific type of custodial (529A) account that allows people with disabilities to save and invest tax-free without losing public benefits.

  • College savings accounts: Like retirement accounts, these offer tax perks for saving for college. A 529 account and a Coverdell education savings account are commonly used for college savings.

You can open many types of non-retirement accounts at an online broker.

» View our roundup of the best online brokers

4. Open your account

Now that you know what kind of account you want, you must choose an account provider. There are two primary options:

  • An online broker will allow you to self-manage your account, buying and selling a variety of investments, including stocks, bonds, funds and more complex instruments. An account at an online broker is a good choice for investors who want a large selection of investment options or who prefer to be hands-on with account management. Here's how to open a brokerage account.

  • A robo-advisor in a portfolio management company will use computers to do much of the work for you, building and managing a portfolio based on your risk tolerance and goals. You'll pay an annual management fee for the service, generally around 0.25% to 0.50%. Robo-advisors often use funds, so they're generally not a good choice if you're interested in individual stocks or bonds. But they can be ideal for investors who prefer to be hands-off.

Don't worry if you're just getting started. Often, you can open an account with no initial deposit. (See our lineup of best brokers for beginning investors.) Of course, you're only investing once you add money to the account and buy investments, something you'll want to do regularly for the best results. You can set up automatic transfers from your checking account to your investment account or even directly from your paycheck if your employer allows that.

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5. Choose investments that match your tolerance for risk

Figuring out how to invest money involves asking where you should invest money. The answer will depend on your goals and willingness to take on more risk in exchange for higher potential investment rewards. Common investments include:

  • Stocks: Stocks are individual shares (pieces of ownership) of companies you believe will increase in value. Learn more about stocks.

  • Bonds: Bonds allow a company or government to borrow money to fund a project or refinance other debt. Bonds are considered fixed-income investments and typically make regular interest payments to investors. The principal is then returned on a set maturity date. Learn more about bonds.

  • Mutual funds: Investing your money in funds — like mutual funds, index funds or exchange-traded funds (ETFs)— allows you to purchase many stocks, bonds or other investments all at once. Mutual funds build instant diversification by pooling investor money and using it to buy a basket of investments that align with the fund's stated goal. Funds may be actively managed, with a professional manager selecting the investments used, or they may track an index. For example, an S&P 500 index fund will hold around 500 of the largest companies in the United States. Learn more about mutual funds.

  • Real estate: Real estate is a way to diversify your investment portfolio outside of the traditional mix of stocks and bonds. It doesn't necessarily mean buying a home or becoming a landlord — you can invest in REITs, which are like mutual funds for real estate, or through online real estate investing platforms, which pool investor money.

If you have a high risk tolerance, a long time horizon and can stomach volatility, you may want a portfolio that primarily contains stocks or stock funds. If you have a low risk tolerance, you may want a portfolio with more bonds since these tend to be more stable and less volatile.

Your goals are important in shaping your portfolio, too. For long-term goals, your portfolio can be more aggressive and take more risks — potentially leading to higher returns — so you may opt to own more stocks than bonds.

Whichever route you choose, the best way to reach your long-term financial goals and minimize risk is to spread your money across a range of asset classes. That’s called asset diversification, and the proportion of dollars you put into each asset class is called asset allocation. Then, within each asset class, you’ll also want to diversify into multiple investments.

Different asset classes — stocks, bonds, ETFs, mutual funds and real estate — respond differently to the market. When one is up, another can be down. So, deciding on the right mix will help your portfolio weather changing markets on the journey toward achieving your goals.

Building a diversified portfolio of individual stocks and bonds takes time and expertise, so most investors benefit from fund investing. Index funds and ETFs are typically low-cost and easy to manage, as it may take only four or five funds to build adequate diversification.

More resources on investing

Do you need more information now that you know the investing basics and have some money to invest? The stories below dive deeper into what's covered above.

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