How to Invest Money

Why You Should Invest Your Money

Investing is one of the most effective ways to grow your wealth over time. While a savings account keeps your money safe, inflation gradually erodes its purchasing power. Investing money puts it to work, giving it the potential to grow faster than inflation and build real wealth through the power of compound returns.

Consider this: $10,000 sitting in a savings account earning 1% annually would be worth about $11,046 after 10 years. That same $10,000 invested in a diversified stock portfolio averaging 8% per year would grow to approximately $21,589. Over 30 years, the difference becomes dramatic — roughly $13,478 in savings versus $100,627 invested. The earlier you start, the more time your money has to compound.

"The best time to start investing was twenty years ago. The second-best time is today."

Before You Invest: Financial Readiness

This guide assumes you already have a solid financial foundation in place. Before investing, make sure you have an emergency fund covering 3-6 months of essential expenses and have paid off any high-interest debt such as credit cards. You should also have a clear picture of your monthly income and how much you can realistically set aside for investing.

If you are still working on these steps, see our Savings and Investment Basics guide for the complete financial readiness checklist. Once your foundation is solid, come back here for the practical steps to start investing.

Step 1: Set Clear Investment Goals

Your investment strategy should be driven by specific goals with defined timelines. Different goals require different approaches:

• Short-term goals (1-3 years): Saving for a vacation, car, or wedding. Use low-risk options like high-yield savings accounts, CDs, or short-term bond funds
• Medium-term goals (3-10 years): Saving for a house down payment or starting a business. A balanced mix of stocks and bonds can provide growth with moderate risk
• Long-term goals (10+ years): Retirement, financial independence, or generational wealth. Stock-heavy portfolios have historically provided the best returns over long periods

Step 2: Understand Your Risk Tolerance

Risk tolerance is your ability and willingness to accept investment losses in pursuit of higher returns. It is shaped by your age, income stability, financial obligations, investment timeline, and personal temperament.

• Conservative investors: Prefer stability over growth; allocate more to bonds and cash
• Moderate investors: Accept some volatility for better returns; balanced stock/bond mix
• Aggressive investors: Comfortable with significant fluctuations; heavily weighted toward stocks and growth assets

Be honest with yourself about how you would react if your portfolio dropped 20-30% in a market downturn. If that scenario would keep you up at night or cause you to sell in a panic, a more conservative approach is appropriate.

Step 3: Choose Your Investment Accounts

The type of account you use matters almost as much as what you invest in, especially when it comes to taxes.

Employer-Sponsored Plans (401k, 403b)

If your employer offers a 401(k) with a matching contribution, this should be your first investment priority. Employer matches are essentially free money — a 100% instant return on your contribution up to the match limit. For 2024, the employee contribution limit is $23,000 ($30,500 if age 50+). Contributions reduce your taxable income, and investments grow tax-deferred until withdrawal in retirement.

Individual Retirement Accounts (IRA)

Traditional IRA: Contributions may be tax-deductible; investments grow tax-deferred; withdrawals in retirement are taxed as ordinary income.

Roth IRA: Contributions are made with after-tax dollars; investments grow tax-free; qualified withdrawals in retirement are completely tax-free. The Roth IRA is particularly powerful for younger investors who expect to be in a higher tax bracket later.

The 2024 IRA contribution limit is $7,000 ($8,000 if age 50+).

Taxable Brokerage Account

A standard brokerage account has no contribution limits or withdrawal restrictions, but investment gains are subject to capital gains taxes. Use this for investing beyond your tax-advantaged account limits or for goals shorter than retirement.

Recommended Account Priority

1. 401(k) up to the employer match (free money)
2. Roth IRA to the maximum ($7,000)
3. 401(k) up to the full limit ($23,000)
4. Taxable brokerage for additional investing

Step 4: Select Your Investments

With your accounts open and funded, it is time to choose what to invest in. Here is an overview of the main asset classes:

Stocks (Equities)

Ownership shares in companies. Stocks offer the highest historical returns (averaging 8-10% annually) but come with the most volatility. Best suited for long-term goals of 10+ years.

Bonds (Fixed Income)

Loans to governments or corporations that pay fixed interest. Bonds provide stability and income, with lower returns than stocks. They help smooth out portfolio volatility.

Index Funds and ETFs

Index funds and ETFs are the cornerstone of most successful portfolios. They track a market index (like the S&P 500), providing instant diversification across hundreds or thousands of companies at very low cost. A single total stock market index fund gives you exposure to the entire U.S. stock market. For most investors, a simple portfolio of 2-3 index funds is all you need.

Real Estate

Invest through REITs (Real Estate Investment Trusts), real estate funds, or direct property ownership. REITs trade like stocks and offer exposure to commercial and residential real estate markets.

Target-Date Funds

An all-in-one solution that automatically adjusts its stock-bond mix based on your expected retirement year. A target-date fund is ideal for investors who want a hands-off approach — pick the fund closest to your retirement year and it handles everything else.

How Much Should You Invest?

A common guideline is to invest 15-20% of your gross income for retirement, including any employer match. However, the most important thing is to start, even if you can only invest a small amount.

• $50/month: After 30 years at 8% returns = approximately $74,518
• $200/month: After 30 years at 8% returns = approximately $298,072
• $500/month: After 30 years at 8% returns = approximately $745,180

Set up automatic contributions on each payday so investing happens before you have a chance to spend the money. This removes willpower from the equation and makes consistent investing effortless.

Investing with Small Amounts

You do not need thousands of dollars to begin investing. Modern tools have eliminated many of the traditional barriers:

• Fractional shares: Most major brokers now let you buy a fraction of a share, so you can invest in any stock or ETF with as little as $1
• No-minimum index funds: Fidelity and Schwab offer index funds with zero minimum investment
• Micro-investing apps: Apps that round up your purchases and invest the spare change automatically
• Commission-free trading: Most major brokers charge zero commissions on stock and ETF trades, so small investments are not eaten up by fees

Common Investing Mistakes to Avoid

• Waiting for the perfect time: Trying to time the market almost always underperforms simply investing consistently. Time in the market beats timing the market
• Not diversifying: Putting all your money in a single stock or sector exposes you to unnecessary risk. Broad index funds provide instant diversification
• Checking your portfolio too often: Daily monitoring leads to emotional reactions and poor decisions. For long-term investments, checking quarterly is sufficient
• Selling during downturns: Market drops are normal and temporary. Selling locks in losses and means you miss the recovery
• Ignoring fees: High expense ratios compound against you over decades. A 1% annual fee can reduce your final portfolio by 25% or more over 30 years compared to a 0.05% index fund
• Chasing hot tips: Investing based on social media hype, celebrity endorsements, or hot tips is speculation, not investing. Stick to a disciplined plan
• Neglecting tax advantages: Not maximizing your 401(k) match or Roth IRA means leaving free money and tax savings on the table

Building an Investment Habit

Successful investing is less about picking the right stocks and more about developing consistent habits:

1. Automate everything: Set up automatic transfers and investments on payday
2. Start small and increase gradually: Begin with what feels comfortable and increase your contribution rate by 1% each year
3. Stay the course: Market volatility is normal. A well-diversified portfolio has always recovered from downturns given enough time
4. Review annually: Once a year, check your portfolio allocation, rebalance if needed, and increase contributions if possible
5. Keep learning: Read books, take courses, and stay informed about personal finance concepts

When to Seek Professional Help

For many investors, a simple index fund portfolio and automated contributions are all they need. However, consider consulting a fee-only financial advisor if you:

• Have a complex financial situation (business income, inheritance, stock options)
• Need help with tax planning or estate planning
• Are approaching retirement and need a withdrawal strategy
• Feel overwhelmed and need a personalized plan to get started
• Have significant assets and want comprehensive wealth management

Look for advisors who are fiduciaries (legally required to act in your best interest) and charge a flat fee or hourly rate rather than commissions on products they sell.