How to Invest Money in 2024: The Smart Beginner's Guide

Learning how to invest money is one of the most important lessons you can learn as an adult, or even older child. Making your money work for you allows you to earn passive income without worrying about wearing yourself down.

The good news is that investing doesn’t have to be complicated or a headache. Whether you invest in a high-yield savings account or a bunch of stocks, you’re making your money work for you in a way that you are comfortable with.

How to invest money

Investing money isn’t complicated when you break it down into these simple steps:

1. Determine how much you can afford to invest
2. Determine your investing goal(s)
3. Decide what to invest in
   
4. Align your investments with your risk tolerance

1. Determine how much you can afford to invest

It’s important to decide how much you can afford to invest before you begin investing so you know how much money you can put aside and not need it prematurely.

You can invest a lump sum or a set amount of money in regular increments, known as dollar-cost averaging. This strategy helps you reduce the impact of volatility and negative market conditions.

To determine how much you can afford to invest:

• Assess your financial situation: Take a look at your current income, expenses, and debts to get a sense of your overall financial picture. This should help you understand how much money you have available to invest.
• Set financial goals: Determine your financial goals and how much you need to save or invest to reach them. This should help you get a picture of your ideal investment amount.
• Start small: Give yourself the time to learn how to invest by starting small and gradually increasing your investments.
• Consider your risk tolerance: Think about the level of risk you are comfortable with when it comes to investing. This enables you to decide how much money you can afford to put into different assets.
• Calculate your investment amount: A general rule of thumb is to save 15-20% of your income for long-term goals, such as investing in retirement savings. However, the amount you can afford to invest will depend on your individual circumstances.

2. Determine your investing goal(s)

Before you begin investing, it’s a good idea to have a clear picture of what you want your money to do for you. You’re not limited to just one goal, either. You can set up different targets for the long term, mid-term, and short term. This is known as the bucket strategy.

3. Decide what to invest in

Once you choose your investing goals, you can decide where to invest your money. Here are some options.

• Savings accounts
• Online brokers and traditional brokerages
• Robo-advisors
• Investing apps
• Tax-advantaged retirement accounts
• Real estate

You should also consider the types of assets you want to invest in, such as stocks, bonds, mutual funds, and cryptocurrency.

4. Align your investments with your risk tolerance

Not all investments are created equal. Buying individual stocks can be like a wild roller coaster ride — you could win big or lose big. But bonds, especially those from the U.S. government, are more like a gentle carousel ride — not much thrill, but safer.

Just like when you’re at the carnival and want to go on all the rides, you should choose all the investments that are within your risk tolerance and goals. That way, if one doesn’t go well, you’ve got others to make up for it. It’s like not putting all your eggs in one basket.

How you divide your money into different investments is called asset allocation. Things like your age, your financial status, and how long you’re planning to invest can all influence allocations within your investment portfolio.

For example, I’m relatively young and have a fairly high risk tolerance. I could handle seeing losses in my portfolio if I could buy more assets at a lower price and reap the gains later. That's why my retirement portfolio is made of 85% stock funds and 15% bond funds since I know I won’t need the money for a long while.

Saving vs. investing

Saving and investing are two methods to manage your money, but they have some important differences.

The goal of saving is to have a reserve of money that you can access in case of an emergency or to achieve a specific personal finance goal, such as saving for a down payment on a house or for retirement. Depending on where you save your money, you may also make some money on your savings, but it may be a lower return than investing.

The goal of investing is to grow your money over time by taking on some level of risk. While there is a potential to earn money on your investment, there is also a possibility to lose money.

In general, saving involves little risk and is focused on preserving your capital. On the other hand, investing involves higher risk and focuses on maximizing the potential return on your money. The best way to approach saving and investing is to view them as parts of a comprehensive financial plan that play different roles in achieving your financial goals.

Where to invest money

You can invest your money in one or more types of accounts and services, including:

1. Savings accounts
2. Online brokers and traditional brokerages
3. Robo-advisors
4. Investing apps
5. Tax-advantaged retirement accounts
6. Real estate

1. Savings accounts

There are many savings accounts options to consider when investing money including:

• High-yield savings accounts: HYSAs pay high interest rates (APY) while allowing liquidity.
• Money market accounts: Money market accounts or MMAs are a cross between a checking and savings account, and often pay higher interest rates. However, they may have higher minimum balance requirements.
• CDs: Many banks also offer Certificates of Deposit or CDs. These are timed deposits that keep your money tied up for a specified period of time and earn higher interest rates.

When looking for the best savings accounts, be sure the bank is FDIC insured and that you can meet the minimum requirements to earn the higher interest rates. Shop around with various banks and credit unions to see your options.

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2. Online brokers and traditional brokerages

Online brokers and traditional brokerages are more accessible than ever. In the past, high minimums kept some people from investing in brokerage accounts.

Today, the best brokerage accounts offer products and services for a wide variety of investors, often with zero or low fees. These accounts typically enable you to invest in stocks, bonds, cryptocurrency, mutual funds, and exchange-traded funds (ETFs).

Some brokerages offer additional features that help new investors. For example, SoFi Invest® is an online brokerage that offers education to beginner and advanced investors through its SoFi Learn portal.

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3. Robo-advisors

If you want to learn how to invest money in a simple and straightforward way, you may enjoy what some of the best robo-advisors have to offer.

Robo-advisors are designed for automatic portfolio management in exchange for a small management fee. Many robo-advisors put together portfolios using ETFs. Some of the more popular robo-advisors, like Betterment, Wealthfront, and Wealthsimple, ask a few questions to get an idea of your goals and risk tolerance and then put together a portfolio that fits your needs.

You don’t have a lot of control with robo-advisors, but it’s pretty easy to “set it and forget it.” Some robo-advisors automatically rebalance your portfolio and make an effort to lower your capital gains taxes. For many new investors, it makes sense to set aside the same amount each month and invest that into a portfolio managed by a robo-advisor.

Some robo-advisors, like Acorns, allow you to invest your spare change. Acorns offers a Round-Ups feature that you can use to automatically round up your purchases to the nearest dollar and invest the rounded-up amount. This can build your portfolio incrementally, although you should also make regular contributions as a part of making effective investment decisions.

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4. Investing apps

Investing apps allow you to invest in individual stocks and ETFs. Some apps, such as Public and Robinhood, allow you to buy fractional shares, which represent a portion of a stock. This gives you access to expensive stocks without buying the whole stock.

For example, say you’re wondering how to buy Amazon stock.. If you want to buy a share of Amazon (AMZN), you might not want to spend over $100 to acquire a single share. Apps that allow fractional shares enable you to buy a portion of the share at a certain minimum, often $1 or $5. This allows you to benefit from the potential growth of Amazon's stock price.

Popular U.S. stocks like Apple (AAPL), Tesla (TSLA), and Google (GOOG) can also be purchased using the best investment apps. When combined with the dollar-cost averaging strategy where you contribute to your investment in fixed time intervals, you can build up to a full share (or more).

Some investment apps, such as Robinhood, have zero commission fees and require a $0 minimum balance. You can use the Robinhood app to invest small amounts of money and learn the ins and outs of active trading.

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5. Tax-advantaged retirement accounts

You might not think of your contributions to your tax-advantaged retirement account as investing money, but it is. Many of these accounts use your contributions to buy stocks, mutual funds, ETFs, bonds, or other assets in an attempt to grow your wealth over time.

The main two categories of retirement accounts are:

• 401(k): This is a retirement plan that is offered through your employer. Options include the traditional 401(k), Roth 401(k), and solo 401(k) for self-employed individuals.These plans come with 401(k) contribution limits that are relatively high ($23,000 in 2024, $30,500 if you're over 50).
• Individual retirement account (IRA): This is a retirement plan you open independently. You can have a Roth or traditional IRA to get different tax benefits. Contribution limits are lower than 401(k)s ($7,000 in 2024, $8,000 if you're over 50), and there are income limits that restrict the amount high-earners can contribute to a Roth IRA. However, other versions of IRAs, such as SEP and SIMPLE, may allow business owners to make larger contributions.

When investing for retirement, consider your long-term tax planning needs:

• Roth versions of IRAs and 401(k)s: These accounts use after-tax money for contributions, allowing you to pay income taxes on your contributions now, so you don’t have to pay taxes when you later make withdrawals from your retirement plan.
• Traditional versions of IRAs and 401(k)s: These accounts come with an upfront tax advantage. You make contributions with pre-tax money, meaning that you don’t pay taxes on these contributions when you make them. The investments in your account grow tax-free until you’re ready to withdraw money. Once you withdraw the money, though, it’s taxed at your regular tax rate.

In general, if you think your taxes will be higher during retirement, putting some of your money into Roth accounts is a good idea. If you think your taxes will be lower during retirement, pre-tax contributions to traditional retirement accounts make sense.

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6. Real estate

You might be surprised at the large number of ways there are to invest in real estate. As I learned how to invest in real estate I could not believe the many options, including:

• Rental properties: You can simply buy a property and rent it to others. The revenue from renting can cover the cost of the mortgage and maintenance and potentially provide income on top of that. If you sell this property later, you may make more money if your sale price is higher than your purchase value.
• Real estate flips: You may find success buying low-cost homes that need work, upgrading them, and then selling them at a profit. There are several factors involved in learning how to start flipping houses, but it can be an enjoyable form of investing.
• Real estate crowdfunding: If you don’t have enough capital to buy a property, real estate crowdfunding platforms can help you access real estate deals at a relatively low cost. Some of the more popular platforms include Fundrise, DiversyFund, and CrowdStreet.
• Real estate investment trusts (REITs): If you want access to real estate but want the ease of trading on the exchange, REITs are a form of trusts that provides this access with relative ease. Instead of investing directly into real estate, you invest in a real estate company that buys and manages real estate. You earn a portion of the profits according to your investment.

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How to set investment goals

Before setting your investing goals, I suggest doing the following:

• Use the bucket strategy: Set short, mid-term, and long term goals. Short-term goals occur within the next three to five years, mid-term five to eight years, and long-term eight to ten years.
• Check your budget: Budgeting is the best way to ensure you invest what you can afford and don’t risk the funds you need. It also ensures that you meet your bucket goals.
• Use online calculators: Consider using online calculators to determine how much to invest in each of your investment accounts, such as your 401(k), high-yield savings, or college savings accounts.
• Pay off debt: Paying off your debt before investing is like investing in yourself. You may even get a higher rate of return when you pay off high interest debt, especially credit cards. Whether it’s better to pay off debt or invest depends on your exact circumstances, but a general rule of thumb is to prioritize eliminating debt that comes with compound interest or has a high interest rate.

Should you get professional help?

Thanks to modern technology, it’s relatively easy to invest on your own or with the assistance of robo-advisors. You can get started even if you don’t have a lot of experience or money.

If you’re still unsure about how to start investing, it might make sense to get professional investment advice. A good investment advisor or certified financial planner (CFP) can help you pinpoint your goals and create an investment strategy. Some financial advisors charge a fee to help you create a plan and provide wealth management recommendations.

Additionally, some robo-advisors will help you build a portfolio but also provide add-on services that allow you to talk to a human financial advisor for a fee. No matter your needs, it’s possible to find someone to help you navigate your investment plan.

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Bottom line

In today’s world, it helps to learn how to invest money — even if it’s just passively with the help of index funds and ETFs — in order to build wealth over time. While savings accounts are an important part of finances, relying on them alone probably won’t help you beat inflation and build an adequate nest egg.

The good news is that you don’t need to be a broker on Wall Street to start investing. Thanks to modern technology, there are many investment apps, online brokerage firms, and robo-advisors that make investing your money simple and straightforward.

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