How to Invest Money
First of all, congratulations! Investing your money is the most reliable way to create wealth over time. If you’re new to the investing world, we’re here to help you get started. It’s time to make your money work for you.
Before you put your hard-earned money into an investment vehicle, you’ll need a basic understanding of how it works. Here are some common ways to invest money:
Stocks are investments in a company's future success. When you invest in a company's stock, you profit along with them.
Just as borrowing money is a part of life for most people, companies and municipalities also borrow money by using bonds.
This popular investment vehicle tracks a market index and can help balance your portfolio.
Learn about exchange-traded funds, or ETFs, which trade in a manner similar to stocks.
The best way to invest is whichever way works best for you. You’ll want to consider your style, your budget, and your risk tolerance.
1. Your style
How much time do you want to put into investing your money?
The investing world has two major camps: active investing and passive investing. We believe both styles have merit. But you might prefer one type over the other, depending upon your lifestyle, budget, risk tolerance, and interests.
More simplicity, more stability, more predictability
- Hands-off approach
- Moderate returns
- Tax advantages
More work, more risk, more reward
- You do the investing yourself (or through a portfolio manager)
- Research-intensive
- Potential for huge, life-changing returns
- Dig deeper: Active vs Passive Investing
2. Your budget
How much money do you have to invest?
You may think you need a large sum of money to start a portfolio, but you can begin investing with $100. We also have great ideas for investing $1,000.
The most important consideration is to have an emergency fund. This is cash set aside that is available for quick withdrawal, if needed. All investments, whether stocks, mutual funds, or real estate, have some level of risk and you never want to find yourself forced to divest (or sell) these investments in a time of need. The emergency fund is your safety net to avoid this.
3. Your risk tolerance
How much financial risk are you willing to take?
Not all investments are successful. Each type of investment has its own level of risk - but this risk is often correlated with returns too. It’s important to find a balance between maximizing the returns on your money and finding a risk level at which you are comfortable. For example, bonds offer predictable returns with very low risk, but they also yield relatively low returns around 2-3%. By contrast, stock returns can vary widely depending on the company and time frame, but the whole stock market on average returns almost 10% per year.