Investing money in the stock market is the No. 1 Americans build wealth and save for long-term goals such as retirement, but figuring out the best way to invest that money can feel daunting. This doesn't have to be the case.
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 right now:
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).
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.
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.
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
Now that you know what kind of account you want, you need to choose an account provider. There are two major options:
An online broker will allow you to self-manage your account, buying and selling a variety of investments, including stocks, bonds, funds and more complex instruments. An account at an online broker is a good choice for investors who want a large selection of investment options or who prefer to be hands-on with account management. Here's how to open a brokerage account.
Don't worry if you're just getting started. Often you can open an account with no initial deposit. Of course, you're not investing until you actually add money to the account, something you'll want to do regularly for the best results. You can set up automatic transfers from your checking account to your investment account, or even directly from your paycheck if your employer allows that.
Figuring out how to invest money involves asking where you should invest money (see our full list of the best investments for any age or income). 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 (piece of ownership) of companies you believe will increase in value.
Bonds: Bonds allow a company or government to borrow your money to fund a project or refinance other debt. Bonds are considered fixed-income investments and typically make regular interest payments to investors. The principal is then returned on a set maturity date. (Here's more on how bonds work.)
Mutual funds: Investing your money in funds — like mutual funds, index funds or exchange-traded funds (ETFs)— allows you to purchase many stocks, bonds or other investments all at once. Mutual funds build instant diversification by pooling investor money and using it to buy a basket of investments that align with the fund's stated goal. Funds may be actively managed, with a professional manager selecting the investments used, or they may track an index. A Standard & Poor's 500 index fund, for example, will hold 500 of the largest companies in the United States.
Real estate: Real estate is a way to diversify your investment portfolio outside of the traditional mix of stocks and bonds. It doesn't necessarily mean buying a home or becoming a landlord — you can invest in REITs, which are like mutual funds for real estate, or through online real estate investing platforms, which pool investor money.