It can feel daunting to begin investing your money, but it doesn’t have to be. Learning how to invest can be the single best thing you can ever do for your financial well-being.
Why investing money matters
Investing money is the number one way Americans build wealth and save for retirement. The benefits of steady investments and compound interest over time are far better tucking cash into a low-interest savings account, as this chart shows:
Learn how to invest your money in five simple steps, even if you’ve never done it before.
1. Decide: DIY investing, or do-it-for-me?
Below we get into the specifics about how to invest (from setting goals to choosing investment vehicles to picking the best place to open an account). 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. And while that used to be a pricey proposition, nowadays it’s quite affordable — cheap, even! — to hire professional help thanks to the advent of automated investment 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.
» Want help investing? Jump off here to see our picks for the best robo-advisors.
All others, let’s continue down the road to getting your money properly invested.
2. Give your money a goal
Figuring out how to invest money starts with determining your investing goals and when you want to achieve them.
- Long-term goals: The universal goal is often retirement, but you may have others as well: 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?
- Short-term goals: This is next year’s vacation, a house you want to buy next year, an emergency fund or your Christmas piggy bank.
In this post, we’re largely focusing on long-term goals. We’ll also touch on investing with no specific goal in mind — the aim to grow your money is a fine goal by itself. 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 recommendations for short-term goals.
3. Decide what to invest in
The investments you choose will depend on your goals and willingness to take on risk. Common investments for what to invest in include:
- Stocks: Individual shares of companies you believe will increase in value.
- Bonds: Bonds allow a company or government to borrow your 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.
- Funds: Funds, like mutual funds, index funds or exchange-traded funds, can be used to purchase many stocks, bonds or other investments 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. A Standard & Poor’s 500 index fund, for example, will hold 500 of the largest companies in the United States.
- 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 like Fundrise, which pool investor money.
For growth, invest in stocks and stock funds
If you have a high risk tolerance and can stomach volatility, you’ll want a portfolio that contains mostly stocks or stock funds. If you have a low risk tolerance, you’ll want a portfolio that has 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’ll probably want to own more stocks than bonds.
If you have a high risk tolerance and can stomach volatility, you’ll want a portfolio that contains mostly stocks
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 types. That’s called asset allocation. Then within each asset class, you’ll also want multiple investments — that’s called diversification.
- Asset allocation is important because different asset classes — stocks, bonds, ETFs, mutual funds, real estate — respond to the market differently. 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.
- Diversification means owning a range of assets across a variety of industries, company sizes and geographic areas. It’s like a subset of asset allocation.
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.
4. Pick an investment account
To buy and sell all of the above investments, you need an investment account. 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’re investing 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 not related to retirement — that dream vacation home, the boat to go with it or a home renovation down the line.
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 is offered by many employers and takes contributions right 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 distributions in retirement 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, but money grows tax-free and distributions in retirement are not taxed. There are also retirement accounts specifically designed for self-employed people.
Ready to open an IRA? See some of our top picks below:
For more options, view our roundup of the best IRA providers.
If you’re investing for another goal:
- Taxable account. Sometimes called nonretirement 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 specific tax advantages. If you’re saving for retirement and you’ve maxed out the above options, you can continue saving in a taxable account.
- 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.
With the exception of a 401(k) — which is offered through your employer — you can open these accounts at an online broker.
Need a taxable account? See some of our top picks:
For more options, view our roundup of the best online brokers.
5. Open your account
Now that you know how to invest your money and what kind of account you want, you need to choose an account provider. There are two major 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 an investment management company that uses computers to do much of the work for you, building and managing a portfolio based on your risk tolerance and goal. 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. Of course, you’re not investing until you actually add money to the account, 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.
See our picks for investment account providers
We’ve spent hundreds of hours researching and reviewing the top online brokers and robo-advisors before selecting the best for our readers. To help you find the one that’s best for you, we’ve highlighted their pros, cons and current promotional offers. See our picks for:
- The best brokers for beginning investors
- The best brokers for stock trading
- The best robo-advisors
- The best IRA account providers
- The best brokers for mutual funds
Now you know the investing basics, and you have some money you want to invest. Feel like you need more information? The below posts dive deeper into some of what we discussed above.
- Our tips for how to invest in stocks.
- See how to build a simple investment portfolio.
- Read our guide to investing 101.
- Learn more about asset allocation and diversification.
- Dig into the differences between a Roth and a traditional IRA.
- Read about five ways to invest in real estate.
- Learn how to choose a financial advisor if you’d like help balancing financial goals.