Investing money in the stock market is the number one way Americans build wealth and save for long-term goals like retirement, but figuring out the best way to invest that money can feel daunting. This doesn’t have to be the case.
The best way to invest money
Everyone has a unique financial situation. The best way to invest money depends on your personal preferences along with your current and future financial circumstances. It’s important to have a detailed understanding of your income and expenses, assets and liabilities, responsibilities and goals when building a sound financial plan and choosing the best way to invest for you.
Here’s a five-step process that can help you figure out how to invest your money:
- Identify your financial goals, timeframe and feelings about risk.
- Decide whether you want to take a “do-it-yourself” or “manage it for me” approach.
- Pick the type of investment account you’ll use (401(k), IRA, taxable brokerage account, education investment account).
- Open an account.
- Choose what investments match your risk tolerance (stocks, bonds, mutual funds, real estate).
And here are the details on how to put your cash to work in the right way, right away.
» Curious about buying stocks? Learn how to invest in the stock market.
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: 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 how to invest with no specific goal in mind. After all, 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 how to invest money for short-term goals.
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 it’s quite affordable — cheap, even! — 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.
3. Pick an investment account
To buy most types of 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 a home renovation down the line.