Investing money in the stock market is the first way Americans can build wealth and save for long-term goals such as retirement. But getting started – discovering the best way to invest your money – can feel dread. It shouldn’t be.
In short, this is how to invest money:
- Decide if you want to take a “do it yourself” or “manage it for me” approach.
- Set your financial goals and when you will need the money you plan to invest
- Choose the type of investment account to use (401 (k), IRA, taxable brokerage account, educational investment account).
- open an account
- Choose investments that match your risk tolerance (stocks, bonds, investment funds, and real estate).
- Here are the details on how to put your money to work the right way, right away.
1.Determine how much you want to invest in
Below we discuss the details of how to invest (from setting goals to choosing the best place to open an account to choosing investment tools). But if the DIY path doesn’t seem to be your cup of tea, don’t worry.
Many savers prefer someone to invest their money for them. Although this was an expensive proposition, it is now available to everyone – cheap, even! – To employ professional assistance thanks to the emergence of automated portfolio management services also known as robo-advisors.
These online consultants use computer algorithms and advanced software to create and manage a customer’s investment portfolio, and they offer everything from automatic rebalancing to improved taxes to reaching human help when you need it.
»Want help with investing? Jump here to see our picks for the best robo counselors.
All the others, let’s continue to explore the best ways to invest your money.
2.Give your money a goal and set a deadline
Knowing how to invest money begins with defining your investment goals and when you want to achieve them.
Long-term goals: The overall goal is often retirement, but you may also have other goals: Want a down payment on home or college fees? To buy a home for your dream vacation or go on a 10-year anniversary trip?
Short-term goals: This is a holiday next year, a home you want to buy next year, an emergency fund or a Christmas piggy bank.
In this post, we focus largely on long-term goals. We’ll also go over how to invest without taking a specific goal into account. After all, the goal of increasing your money is a good target in itself.
In general, money should not be invested for short-term goals at all. If you need the money you save in less than five years, review our recommendations on how to invest money to achieve short-term goals.
Need some help? The tool below will provide recommendations based on your goal and time horizon.
Financial goals chart
Are you wondering where to save or invest to achieve your goals? Our financial goal planning tool will help guide you toward the right calculations, based on your goal, time horizon, and other factors.
Let’s hear about your goals.
What are you saving for?
Buying a home
3.Choose an investment account
To purchase most types of stocks and bonds, you will need an investment account. Just as there are a number of bank accounts for different purposes – audits, savings, money market, certificates of deposit – there are a few investment accounts that you should know about.
Some accounts offer tax benefits if you invest for a specific purpose, such as retirement. Keep in mind that taxes or penalties may be imposed on you if you withdraw your money early, or for a reason that is not eligible under the plan rules. Other accounts are general purposes and should be used for non-retirement goals – that your dream vacation home, or the boat to go with or renew the home down the line.
Below is a list of some of the most popular investment accounts:
If you are investing for retirement:
401 (k): You may already have 401 (k), which is offered by many employers and takes direct contributions from your salary. Many companies will match your contributions, up to the maximum – if you do, you must contribute at least enough to win this match before investing elsewhere.
Conventional or Roth IRA: If you are already contributing to 401 (k) or don’t have one, you can open an individual retirement account. In the traditional IRA, your contributions are tax deductible, but dividends in retirement are taxed as normal income. A Roth IRA is the cousin of the traditional version, with reverse tax treatment: contributions are made after tax, but money grows tax-free and dividends are not taxed.