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 along with your current and future financial circumstances.
Here’s a five-step process that can help you figure out how to invest your money right now:
- Identify your financial goal and when you want to achieve that goal.
- Decide whether you want to manage your money yourself or work with a service that does it for you.
- Pick the type of investment account you’ll use.
- Open an account.
- Choose your investments.
And here are the details on how to put your cash to work in the right way, right away.
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 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: These goals are less than five years away. This is 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 how to invest money for short-term goals.
In this article, we’re largely focusing on investing for long-term goals. We’ll also touch on how to invest with no specific goal in mind. After all, the aim to grow your money is a fine goal by itself.
» Curious about buying stocks? Learn how to invest in the stock market.
2. Decide how much help you want:
Once you know your goals, you can dive into the specifics about 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. And while that used to be a pricey proposition, nowadays you may find it’s 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.
» Learn more: What is a robo-advisor?
If you’d rather do it yourself, continue reading — we’ll take you through the steps.
3. Pick an investment account:
To buy most types of investments, including stocks and bonds, you’ll 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 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 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 and do not offer upfront tax-deductibility, but money grows tax-free and distributions in retirement are not taxed. There are also retirement accounts specifically designed for self-employed people.
