Updated October 5, 2020

How to Invest Money: Make Your Money for You

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To make money, you need to start investing. Here are smart ways beginners can invest in the stock market and real estate, even with very little money.

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Want to invest but not sure where to start? Investing your hard-earned money may seem really scary, but it doesn't have to be.

Here's the thing: Your savings will only get you so far. If you want to build real long-term wealth, then you must put your money to work for you.

Luckily, now is a good time to start investing. You no longer have to figure out everything yourself. There are plenty of investing tools and services to help you out.

You don't need to be an expert or have a lot of money. All you need is a starting point. We break down the basics of investing, as well as the best types of investments for beginners.

How to invest money in four simple steps:

  1. Decide if you want to do the investing yourself or use a robo advisor.
  2. Identify your investing goals and timeline.
  3. Determine your risk tolerance and choose investments that match it.
  4. Open the right account for your goals (taxable, retirement, or other specialty account)

Best Ways to Invest Money for Beginners

Type of InvestmentGood For
Robo AdvisorsPassive hands off investing
StocksLong term growth
BondsStable low risk investing
Mutual Funds & ETFsInstant diversification
Employer 401(k)Retirement planning
Traditional or Roth IRARetirement planning
Real Estate CrowdfundingAlternative investing

You will learn more information about these investment options below.

Investing Rule of Thumb: Aim to invest about 20% of your take-home income. Prioritize saving for retirement in a 401k and IRA and start as early as possible. To minimize risk, diversify your investments across a variety of investment products, such as stocks, bonds, and real estate.

Why You Should Invest Now

Investing as early as possible will give you the best chances of success.

Why start ASAP? Simple: the power of compounding interest.

Compound interest will boost your investment because it grows at a faster rate as time goes on.

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Let's say you start with an initial investment of $1,000. After 20 years at 10% returns, you will end up with a total of $6,727.50.

Now, if you invest another $1000 every month, over the course of 30 years at 10% returns, that will literally turn into millions of dollars thanks to compound interest. Now you see the reasons why it's such a huge deal and why it's important to start early.

First, interest is earned on your original investment amount. Then, your interest also earns interest. This makes each interest amount earned higher than the previous amount. From there, it keeps growing and growing.

Compounding can have a very powerful "snowball" effect. The sooner you start investing, the more time you have for your money to grow. The more chance you have to reaching your goal.

Investing in your 20s:
It's good to start early. Investing even small numbers (like $20 a month) is better than nothing, and can turn into thousands over time. However, if you have high interest debt (like credit card debt or student loans), it's best to pay that off first. Otherwise, your interest payments will wipe out any earnings.

Four Simple Steps to Start Investing

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A lot of people have a fear of investing. You're not alone. 1 in 3 Americans are afraid to invest. But in reality, it doesn't have to be intimidating. Just follow this simple process to get started on your investing journey.

1. Decide DIY or Robo Investing

Are you comfortable choosing your own investments and managing your own portfolio? This is something that a lot of beginner investors are unsure of.

If you don't want to make your own choices, you may want to take a look at investing through a robo-advisor.

Robo-advisors automatically invest for you. An algorithm picks investments for you according to your goals and risk profile. And they handle all the managing of your portfolio too. You don't need any investing experience or knowledge.

Hiring an investment advisor may be out of reach for a beginner investor, so this is a more affordable option to a financial planner.

2. Identify Your Investment Goals

What are your financial goals?

  • To have a comfortable retirement?
  • Hoping to buy a house in the next few years
  • Saving for your child's education?
  • Financial freedom?

List down all your short term and long term goals. Usually, investing money is best for long term goals (at least five years out). The reason for this is so you have time to ride out ups and downs of the stock market. It's perfectly normal for markets to dip from time to time.

If you need money for something in the near future (like buying a home or going on a trip), in this case, it's better to save the money in a more stable high-yield savings banking account.

Do you need a good credit score to open investment accounts?
Generally, brokers do not check your credit score when you open a regular investment account. Your trading activities will not affect your score. A margin account may require a check, but that should only be for more experienced investors.

3. Determine Your Risk Tolerance

Your risk tolerance is how much risk you can afford to take. The main determining factor is your age. As our lives change, your risk tolerance will too.

If you are young (in your 20s and 30s) and are saving for retirement, then you can afford to take a riskier approach. The further away your time horizon, the more time you have to recoup a loss.

A higher risk tolerance means you can have a more aggressive investment strategy. Your portfolio can contain a majority percentage in stocks, which are more volatile but also have more potential for bigger rewards.

On the other hand, for someone older and closer to retirement age, then look for less risky investments. You'll want to have a bigger part of your portfolio in bonds, which are more stable.

How you split your investments is called asset allocation. For example, for different tolerances, this is what your allocation may look like.

  • High risk (aggressive): 90% stocks / 10% bonds
  • Medium risk (moderate): 60% stocks / 40% bonds
  • Low risk (conservative): 30% stocks / 70% bonds

4. Open the Right Account for Your Goals

Now, you're ready to open your investment account. You will need to open a brokerage account with either a robo or DIY investing platform.

You'll be asked to choose what kind of account to open. There are a number of account options depending on your goals:

  • Taxable account: This is a general purpose investment account. You can withdraw funds at any time, so it's ideal for shorter term goals. There's no limit to how much you can invest.

  • Retirement account: This includes Traditional and Roth IRA. These accounts offer tax advantages, but there are early withdrawal rules if you withdraw before age 59. There is a contribution limit.

  • 529 College savings account: This is for your children's college tuition savings and also offer tax benefits.

You can open more than one type of account at each brokerage (or even at multiple places!). It's a good idea to have both taxable and retirement accounts.

Best Ways to Invest Money for Beginners

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Now that you understand how to get started... the next question is: what do you invest in?

Here is an overview of seven easy investing ideas for rookies, or even for more experienced investors! With this guide, you'll be ready to take the next step.

Keep in mind that any form of investment has the possibility to lose money too. There is no guarantee that you will see gains. Brokerage accounts are not FDIC insured by the government. They do have SIPC insurance, which protects you against the brokerage firm going out of business, but not against market losses.

Use a Robo Advisor

Using a robo-advisor is the easiest way to start long term investing for beginners and young adults. It automatically invests your money for you and manage your portfolio. It's a good choice for investors who want to be completely hands-off.

You answer questions about your goals and preferences, and the software algorithms will create an investment strategy. It makes all the investment decisions for you and takes care of all the buying and selling so you don't have to worry about anything.

It takes the emotion out of the investing, so you don't make rash decisions if stock prices fall.

In addition, robo advisors will automatically handle complicated tasks like rebalancing your portfolio and tax saving strategies. This can help you stay on track better than if you were to do it yourself.

A lot of robo-advisor platforms don't have account minimums, so you can open an account even with just a little bit of money. Here are some favorite ones:

  • Betterment: No minimum, 0.25% annual fee
  • Acorns: Automatically invests your spare change; No minimum, starts at $1/mo
  • Wealthfront: $500 minimum, 0.25% annual fee

See our complete guide to the top robo advisors. Note that they do cost you a small fee for the service, but they're a good way to get your feet wet in the world of investing.

Invest in Stocks

If you want control in how you invest, you can start with purchasing a handful of individual stocks. A stock is a direct investment in a company. When you buy a stock, you are owning a tiny piece of the company.

In the past, you had to have some capital to invest in stocks. Luckily today, the barrier to the stock market has never been so low.

Almost all major brokerages have eliminated trade commissions for stocks. So you can now make trades for free.

Plus, a lot of stock brokers also offer fractional shares. This means you can buy just a small fraction of a stock if you don't have enough for a full share. So instead of needing $500 to buy a single share of Netflix stock, you can just invest $50 and buy 1/10 of a share.

Start with one of these apps for those just getting into stock trades.

  • Stash Invest: Guides you to pick stocks that match your goals. Charges $1/month for basic account.
  • M1 Finance: Create your own portfolio and M1 manages for you. Commission free trades, $100 minimum. No management fees.
  • Robinhood: Discount broker app for trading stocks, options, and cryptocurrencies with no trading commissions. No deposit requirements.

Tip: Investing in stocks take some effort to research. Here are some different stock options. It's good to have a mix.

  • Growth stocks - from companies with high growth potential; typically don't pay dividends
  • Dividend stocks - usually from large blue chip companies with stable history; pay dividends on a regular basis which can be a great form of cash flow
  • Defensive stocks - stable stock price and performance not affected by things like economy conditions and political crisis

Buy Low Risk Bonds

It's important to mix your portfolio with stocks and bonds. Bonds more predictable and less risky than stocks, so it's a good idea to have a portion of investments in bonds to balance out risk.

A bond is a type of debt investment. It's essentially a loan to a company or government to help fund new operations (just like how you might need a bank loan for your mortgage).

Bond are fixed-income securities. The companies borrow money and agree to make interest payments at a fixed interest rate over a set period of time. At maturity, you'll get your principal back.

There are three main types of bonds. They have different maturities ranging from one to thirty years.
  • Corporate bonds: offered by corporations looking to raise capital
  • Municipal bonds: issued by towns, cities, and states to fund public projects
  • Treasury bonds (T-bonds): offered by the federal government (different from savings bonds, which can only be purchased directly from the US Treasury)

See "Difference Between Stocks and Bonds" for more information.

Get Instant Diversification With Mutual Funds And ETFs

Buying mutual funds and ETFs is another great approach for rookie investors.

A mutual fund is a basket of assets like stocks or bonds. They are professionally managed, which makes it ideal for new investors. One mutual fund can contain hundreds of securities, so you're instantly invested in a diversified portfolio with just one transaction.

Mutual funds are usually purchased in dollar amounts and trade just once a day at closing. You can purchase them directly through the mutual fund company (such as Vanguard or Fidelity) or through a brokerage.

In much the same way, exchange-traded funds (ETFs) are also a collection of stocks and bonds. But they are purchased in shares and traded just like stocks throughout the day.

Index funds are a category of mutual fund or ETF that follows a specific market index. For example, you can buy into an S&P 500 Index fund, which invests in the 500 largest U.S. companies.

Funds have fees have expense ratios. This covers the operating costs of the fund, such as for management, administration, marketing, etc. This is important to pay attention to because the expense ratio will eat into your profits. Usually an expense ratio anywhere between 0.2% - 0.75% is good. A fund that charges over 1% is considered high.

A full-service stockbroker like E*Trade or TD Ameritrade offer thousands of mutual funds and ETFs.

Enroll in your Employer 401(k)

If you don't have loads of extra money to invest, making use of your employer 401(k) plans is the best place to start. Most employers will match 401(k) contributions. That's free money they're offering towards your retirement.

When you enroll in a 401k plan, a portion of your salary is taken out even before the paycheck reaches your hands. You don't see it and so won't even miss it. That money gets invested and will grow.

Even better news - your 401k contributions are tax deductible, so your tax bill will be less.

Contribute up to at least the company match amount. Otherwise, you're leaving free money on the table. Even if your company doesn't offer a match, still contribute whatever you can. You can increase the amount as you get raises.

Let's say your company matches up to 5%. Automatically send 5% of your paycheck to your 401k. Your employer will match that 5%. So already, you have invested 10% of your salary even before you get that paycheck.

Blooom is a unique tool to help you analyze your 401k for free and provide suggestions. For $10/month the robo-advisor service can manage your 401(k) account for you.

Save for Retirement in an IRA

IRAs are Individual Retirement Accounts that you can open at brokerages. It allows you to invest more for retirement beyond an employer 401k. IRAs provide tax advantages.

There are two personal IRA account options:

  • Traditional IRA: Contributions are tax deductible when it's time to fill out tax return. You pay taxes when you withdraw the funds, but the benefit is that you'll most likely be in a lower tax bracket by then.

  • Roth IRA: This is the opposite. Contributions are made with after-tax dollars and not tax deductible. However, the upside is that your withdrawals are tax-free.

You can open IRAs either from a self-directed trading platform or a robo-advisor. Whichever route you take, beware of contribution limits. For 2020, the maximum amount you can invest in a Roth is $6,000. If you're 50 or over, you can contribute $7,000 (called a catch-up contribution).

You can also rollover your company's 401(k) into an IRA account.

For business owners or self-employeed individuals, there are SEP and SIMPLE retirement account options.

Invest in Real Estate Crowfunding

You no longer need to be a millionaire to enter the the world of real estate investing. Real estate crowdfunding has made it possible for everybody to get their hands in this space.

Crowdfunding platforms let you pool money with other investors to fund projects together. You earn returns from the rents collected and when the property appreciates in value.

The platform will automatically invest your money in different properties. It handles all the management, so you're free of the responsibility of dealing with tenants, repairs, and other hassles of being a landlord.

These real estate crowdfunding sites are open to everyone:

  • Fundrise: $500 minimum. Invest in diverse real estate properties across the US.
  • DiversyFund: $500 minimum. Invest in multi-family rental homes.
  • Rich Uncles: $5 minimum. Invest in commercial rentals.

Historically, the real estate market has had higher returns than the stock market, so this is a great way to invest in this sector.

These types of real estate crowdfunding are only done through the platforms and are not sold on public exchanges. So a downside is that this is usually at least a five year investment.

More Options for Investing

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To further add diversity and put your money to work, you can consider some alternative investing options like the following:

Invest in commodities
Commodities are physical resources like precious metals (gold & silver), gas, oil, and livestock. Many people invest in commodities as a protection against the volatility of the stock market and difficult financial times.

Peer-to-Peer Lending
Peer-to-Peer lending (P2P) lets you lend money to people who don't qualify for traditional bank loans. Lenders earn returns as people pay back the loan with interest. LendingClub is a popular P2P lending platform.

Returns can range from 4-10%, but there is possibility that people may not pay it back. You can minimize the risks by investing in multiple notes in micro amounts.

Worthy bonds
The Worthy investing platform allows you to purchase bonds that offer loans to growing American businesses. Worthy offers a fixed 5% returns and you can invest as low as $10 in each bond. You can cash out your money at any time with no fees.

How are investments taxed?
Dividends are to be reported every year. The tax rate depends on your income. For investments that increase in value, you only pay taxes when you sell a security and make a profit. Any capital gains will be taxed according to how long you've had the investment and your taxable income.

Best Short Term Investments

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If you are saving cash for near future goals (less than 5 years), it's best to put your money in risk-free investment vehicles. This way, your principal won't lose any value.

You can use some of these options for short term goals:

High yield savings account
A savings account is a great place to park your cash and have it grow a little. It's ideal if you'll need quick access to your money, like for an emergency fund.

Here are some of our top picks for online savings accounts with high APY rates. A lot require no minimum deposits or balances.

Money market accounts function much the same way, but some offer checkwriting and bill pay functions.

Unlike a checking account, these accounts have withdrawal restrictions. You only get six transactions per statement cycle.

Certificates of Deposit
A CD requires you to commit your money for a fixed amount of time. But in return for less liquidity, the bank or financial institution often offer higher yields. Keep in mind that if you withdraw your money before the maturity dates, you'll incur a penalty.

Money market funds
This is a sort of extremely conservative mutual fund. It invests in short-term cash equivalent securities, like treasuries, CDs, and commercial papers. It's a very safe investment that you can take out at any time.

How Much Should You Invest

The general rule of thumb is to invest 20% of your take home pay. This can be spread among a combination of short term savings, general investing purposes, and retirement accounts.

The budget guideline should look like this:

  • 50% for necessary expenses like housing, car, utilities, and basic food
  • 30% for fun things like eating out, movies, shopping, etc.
  • 20% for savings and investing

Being able to meet this investing goal does require a willingness to practice good money habits and budget. If you need help, use one of these online budget tools.

Once you start investing, you'll have to keep an regular eye on your money. Some investments will perform better than others, so you may need to make changes to your investment strategy.

You can use one of these investment management tools to easily keep track of your portfolios. They allow you to link up accounts from all your financial institutions, so you can keep track of everything in one place.

Managing Risk for New Investors

Don't think of investing as a gamble with your hard earned money. The key aim is to minimize risk. The best way to do so is by diversifying your portfolio with assets of different levels of risks and sectors.

In other words, don't put all your eggs in one basket. Instead of investing a lot of money into one single stock, spread out your investments into many different stocks. An easy way to do this automatically is investing in ETFs and mutual funds.

It's also important to diversify your investments in an array of asset classes. Some examples include:

  • US stocks
  • US bonds
  • Global stocks
  • Global bonds
  • Commodities
  • Real estate

Even within each asset class or group, invest in companies in a variety of industries. This way, let's say the technology sector experiences failure, you won't be in trouble. You may still have investments in the healthcare area to balance it out.

Another strategy to lessen risk is dollar cost averaging. This is when you spread out stock purchases over set intervals, instead of buying in one lump sum. This reduces the impact from market fluctuations.

Remember, the general rule of thumb is that the more risky the investment, the higher the reward (and vice versa).

Be aware of risky investment products like penny stocks and sketchy opportunities like pyramid schemes. These carry a high chance of poor results so we recommend that you steer clear. The odds are usually not in your favor, so it's not worth it to make a quick buck.

But First - Before You Invest Money

As much as you may be tempted to dive right into investing, it's important to get your personal finance situation in order first before you invest. Investing should only be done after sorting out other money issues.

Before you invest, consider these factors. Do you have:

1. An emergency fund
It's important to have funds set aside to cover emergencies like car repairs or medical bills. In the event that you lose your job, it'll act as a safety net to pay for mortgage or rent, food, utilities, and other necessities.

Many advisors recommend enough to cover three to six months of living expenses.

2. A healthy level of debt
If you have credit card debt, especially those with high interest rates, it's important to prioritize paying off credit cards before you focus on how to invest money.

Some debts, like fixed-term debt such as mortgages or car loans, are usually not a problem, because they have lower interest rates and a fixed payment plan.

3. A retirement plan
No matter your age, it's important to know how you will save for retirement and to get started soon. Take advantage of all the tax-advantaged retirement accounts that you can.

The easiest way is to contribute to your company's 401k. If you don't have one, then prioritize investing in an IRA over other types of investments.

If your're a person who prefer investments with zero or very low risks, there are also plenty of safe investments to protect your principal and keep pace with inflation.

What Experts Say

CreditDonkey assembled a panel of industry experts and authority figures to answer readers' most pressing investing questions:

  • What is the best way to invest a windfall of $50?
  • Is it better to save or invest during a recession?
  • What do you recommend for savers with a lot of cash but zero investing experience?
  • Is using an auto-managed portfolio a reliable way to save for retirement?
  • What advice do you have for a first-time investor who wants to create a retirement fund?

Here's what they said:

Bottom Line

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When you learn the fundamentals of how to invest money, you'll have the opportunity to make your money work for you. Investing is crucial if your goal is long term wealth building. Not investing your money is literally just like stuffing money under the mattress.

Make sure to identify your goals and investing needs first. Then with the above investment strategies, you can start to build a portfolio and grow your money. Whatever approach you take, before investing in anything, do your homework and due diligence. Consider the pros and cons.

The fact is the sooner you can start investing, the more you can benefit and grow your retirement nest egg. With smart methods, even small sums can turn into fortunes. Good luck!

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

TD Ameritrade has not influenced the content of CreditDonkey. CreditDonkey may earn compensation for accounts opened at TD Ameritrade.

CreditDonkey is a paid Affiliate/partner of Stash. Investment advisory services offered by Stash Investments LLC, an SEC-registered investment adviser. This material has been distributed for informational and educational purposes only, and is not intended as investment, legal, accounting, or tax advice. Investing involves risk.

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