How to Invest Money

You want to invest, but you’re not sure how to invest money. This could be your New Year’s resolution or peer pressure from your co-workers to do it, but you don’t know how. And, you want to do it right!

It’s nerve racking – I understand. It doesn’t have to be. Here’s how to put your cash to work in the right way, right away.

Follow these steps to set achievable goals based on your time frame, choose assets that match your risk tolerance and determine whether to take a “do-it-yourself” or “manage it for me” approach.

1. How do you want to invest

Before we learn how to invest money, we need to know how much help you want doing it. If you’re a do-it-yourself type person, then finding & opening a brokerage account isn’t difficult. Competition has driven most platforms to offer free trades of ETFs and stocks.

But, maybe you prefer having someone invest for you. And while that used to be expensive, nowadays it’s quite affordable — free, even! — thanks to the creation of automated portfolio management services such as robo-advisors.

These online advisors use advanced software to build and manage your investment portfolio, offering everything from automatic re-balancing to tax optimization. All of them provide access to human help when you need it in case you have questions or concerns.

My favorite robo-advisors:

• M1 Finance 
• Wealthfront

My favorite free stock trader:

• Robinhood 

2. Set a Money Goal

Figuring out how to invest money starts with determining your investing goals and when you want to achieve them.

• Long-term goals: The end goal is to retire, but you may have others as well: Do you want a down payment on a house? Kid’s college tuition? Purchase your dream vacation home?
• Short-term goals: This is next year’s vacation, an emergency fund, or to save for Christmas.

In this article, I’ll largely focusing on long-term goals. I’ll also touch on how to invest with no specific goal in mind. After all, the aim to grow your money is a fantastic goal by itself.

3. Investment and Risk Tolerance

Where should you invest your 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: Individual shares of companies you believe in, or hope will increase in value.
• Bonds: Bonds allow a company or government to borrow your money to fund a project or refinance debt. Bonds are considered fixed-income investments because they pay you based on a regular basis at a predetermined interest rate. The amount invested is then returned on a set maturity date. (Here’s more on how bonds work.)
• Exchange-Traded Funds: Investing your money in funds — like mutual funds, index funds or exchange-traded funds — allows you to purchase numerous stocks, bonds or other investments together. These funds build instant diversification by pooling your money with others to buy a range of performing assets. For example, the Standard & Poor’s 500 index fund holds 500 of the largest companies in the United States.
• Real estate: Real estate is another way to diversify your investment portfolio. It doesn’t necessarily mean buying a home or becoming a landlord — you can invest in REITs, which usually pay dividends monthly or quarterly.

Long-term growth, invest in funds

If you have a high risk tolerance, you’ll want a portfolio that contains mostly funds or stocks. 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. Either way, the daily swings of the market shouldn’t worry you unless you’re investing for the short-term – three years or less.

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, real estate — respond to the market differently. When one is up, another can be down. Deciding on the right mix can help you mitigate the losses that can occur during a roller coaster market.

• Diversification means owning a range of assets across a variety of industries, company sizes, and regions. Basically, it’s a subset of asset allocation.

Building a diversified portfolio of individual stocks and bonds is difficult, so most investors benefit from fund investing. Index funds and ETFs are low-cost and easy to manage while offering instant diversification.

4. Choosing your Account

To invest your money you need an investment account. Some accounts are tax-advantaged, while others aren’t.  If you plan to invest for the long-term, such as retirement, tax-advantaged accounts should be your priority. Keep in mind that you may be taxed or penalized if you pull your money out early.

» Want to know more: Tax-advantaged accounts?

Other accounts are general purpose and should be used for short-term goals such as that dream vacation or that coveted boat for fishing next season.

Here’s a list of some of the most popular investing accounts:

• 401(k)
• Roth 401(k)
• 403(b)
• Roth 403(b)
• Roth IRA
• Traditional IRA
• Health Savings Account
• 529 College Savings Plans

IF YOU’RE INVESTING FOR RETIREMENT:

A 401(k) or Roth IRA is your best option. 401(k) is offered through your employer and usually has matching options for each dollar you contribute. If not, a Roth IRA is something you can start right away. M1 Finance offers FREE Roth IRA accounts with “pies” for instant asset allocation and diversification.

» How much can you contribute: 2020 Retirement Limits

If you’re investing for another goal:

• Taxable accounts. These offer no tax advantages and are used for short-term investments or to play around in the markets. There’s no rules on contribution amounts, and you can take money out at any time. Robinhood offers FREE taxable accounts with unlimited FREE trades.

You can open a majority of these accounts with any online broker.

Start Investing

Now that you know how to invest your money and the kind of account you want, it’s time to get started. Start by setting up your account with one of the brokers I recommended. Once your account is verified, you can start investing right away.

I recommend setting up automatic transfers from your checking account to your investment account, or even directly from your paycheck if you can. This makes investing thoughtless and soon enough, you’ll forget that your investing accounts are accumulating wealth.

» Learn the basics: Investing for Beginners 101