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How To Invest: The Smart Way To Make Your Money Grow

You can trust the integrity of our balanced, independent financial advice. We may, however, receive compensation from the issuers of some products mentioned in this article. Opinions are the author's alone, and this content has not been provided by, reviewed, approved or endorsed by any advertiser.

How to invest money wisely

If you want a shot at becoming wealthy, you need to do more than simply earn money. Most importantly, you need to hold onto the money you earn. And then, you need to grow your money. In order to grow your money, you need to learn how to invest.

When you become an investor, you’ll be using your money to acquire things that offer the potential for profitable returns through one or more of the following:

  • Interest and dividends from savings or dividend-paying stocks and bonds
  • Cash flow from businesses or real estate
  • Appreciation of value from a stock portfolio, real estate, or other assets

As you learn to become an investor, you will begin to devote your limited resources to the things with the largest potential for returns. That may be paying down debt, going back to school, or fixing up a two-family house.

Of course, it may also mean buying stocks and bonds, or at least mutual funds or exchange-traded funds.

Thanks to advances in technology, you can start to invest with as little as $5 a month and a smartphone. It’s our job to help you filter out the noise, learn the basics, and make good investment decisions from the start.

With no fees on accounts with low balances and easy automatic investing, Wealthfront is our top pick for a best all around investment account. If you want to learn more about them, read our Wealthfront review.

So here are the basics of how to invest—wisely.

Table of contents

    Why invest?

    Why invest?

    Investing allows you to significantly grow your money over time thanks to the power of compound returns.

    Compounding can be called the Eight Wonder of the World. Thanks to the power of compounding, a single penny could grow into millions of dollars, given enough time. You may not live that long, but consider the following examples.

    Say you start investing when you’re 16…

    As unrealistic as it may sound to start investing that young, say you got a small inheritance and you decided to invest it—if you put $5,000 in an account with an interest rate of 7 percent and contribute an extra $200 a month, after 30 years you’ll have a little over $264,000.

    start saving now

    Using a more realistic example, say you start investing when you’re 22, right after graduation…

    You start out just putting $50 a month into your 401k, with a 50 percent company match.

    If you raise contributions by the same amount as any pay raises, you’ll have more than $1 million by age 65. That assumes annual raises of 3.5 percent and an 8.5 percent return on 401(k) investments.

    While there are many factors to consider—a simple example like this demonstrates the power of compound interest if everything goes right.

    So if you want to start saving now, you could even have a whole year’s salary saved by the time you’re 30…Take a look at the chart below to see how.

    How To Save A Year’s Worth Of Salary In Your 401(k) By Age 30
    AgeSalaryYour 6% Contribution3% Employer MatchTotal ContributionsYear-End 401(k) Balance
    22$30,000$1,800$900$2,700$2,889.00
    23$30,900$1,854$927$2,781$6,123.60
    24$31,827$1,910$955$2,864$9,707.07
    25$32,781$1,967$983$2,950$13,670.03
    26$33,765$2,026$1,013$3,039$18,045.62
    27$34,778$2,087$1,043$3,130$22,869.71
    28$35,822$2,149$1,075$3,224$28,181.14
    29$36,896$2,214$1,107$3,321$34,021.95
    30$38,003$2,280$1,140$3,420$40,437.60

    When should you invest?

    Now that you know why you should invest, how about when to invest?

    The answer to that is pretty simple. The right time is now.

    Investing sounds more intimidating that it is. Yes, there’s always a potential risk for loss, but there’s an even bigger potential for serious gain.

    Doing anything for the first time can be terrifying, especially when it involves your hard earned cash. But here’s some advice for first time investors.

    Investing for the first time

    Investing is like religion—people have some strong opinions and may even belong to one of many sects or schools of thought. Here are a few that come to mind:

    • The Doomsday Preppers – these people are convinced our financial system will collapse, so they stick all their money in gold and real estate.
    • The Gambling Day-Traders – these are most often the people you see in movies, with their desks or walls covered in monitors and TVs, watching every second of the day and seeing how the stock market changes.
    • The Indexers – these are people who simply invest in everything in order to take advantage of the slow and steady increase in the overall value of the markets.

    If you already belong strongly to one of the above camps, you may not find the investing resources on Money Under 36 useful. If, however, you have an open mind and are interested in learning simple strategies for successful lifelong investing—without any gimmicks—then read on.

    If you’re on the fence about where and when you should invest, make sure you’re taking advantage of guaranteed interest rates. High yield online savings accounts are currently offering over 2% with FDIC insurance (which means your money is insured by the federal government).

    Marcus has always offered strong interest rates on their deposit accounts and they current sport a 2.25% APY on all balances for their online savings account.

    If you’re OK with putting your money away for a CD Term, they also have APY’s in the 3% range for terms of four and five years.

    Marcus can also offer you a loan if you’re in the market for one.

    Risk vs reward

    It’s true: Investing involves risk. We’ve all heard stories about investors who lost half of their fortunes in the Great Depression or even more recently in the Great Recession. We’ve heard about the Bernie Madoff’s of the world and investors who lost everything to a scam. Although you can never eliminate risk entirely, you can significantly reduce risk if you invest wisely.

    The great thing about investing young, is you’re likely investing in longer-term investments—like your retirement account. These investments are less risky than quick-fix stock trading by people who really don’t understand what they’re doing.

    While investing can be risky, it’s best to just deal with that risk, because not investing can cost you a lot more money than losing a little of money on a bad investment.

    We talked about compound interest above, and the key rule to that is—the sooner you start to save the more your money will earn over time. Take a look here

    to see the big difference between someone who started investing at 25 versus 35. You could be missing out on hundreds of thousands of dollars if you start saving later.

    What do you invest in?

    Our philosophy is to keep investing as simple as possible

    Create broad diversification through a mix of low-cost mutual funds and ETFs, while keeping it fun by holding individual stocks with up to 10 percent of your assets.

    The most important factor in being a successful investor is not the stocks and funds you pick. Successful investing depends on:

    1. Choosing proper asset allocation – the overall mix of bonds, stocks, and cash you hold in your portfolio.
    2. Making and sticking with an automatic investment plan – this way you avoid making terrible, emotionally-charged decisions—like selling at the bottom of a market crash.

    The investing information on Money Under 36 barely scratches the surface of all the knowledge out there about investing, but that’s OK. We’re not trying to train the next class of hedge fund generations so much as give the average person enough knowledge and confidence to begin investing on your own.

    Mutual funds

    A mutual fund is a type of professionally managed investment that pools your money with other investors. The fund’s managers then use the pooled money to buy securities for the group.

    It’s best to start out investing in mutual funds or exchange-trade funds rather than individual stocks and bonds until you get your feet wet. These types of funds enable you to invest in a broad portfolio of stocks and bonds in one transaction rather than trading them all yourself.

    They’re not only safer investments (because they’re diversified), but it’s often far less expensive to invest this way. You’ll either pay just one trading commission or nothing at all (in the event you buy a mutual fund directly from the fund company), as opposed to paying trading commissions to buy a dozen or more different stocks.

    Although mutual funds can be purchased through any brokerage account, you’ll save money on trade commissions by buying funds direct through a mutual fund company like Fidelity or Charles Schwab.

    Bonds

    Whether it’s corporate, municipal or treasury, bonds are a great way to leverage your investment against the success of other entities. Bonds are a debt security which raise capital for others. They finance new companies, local projects and even the US Government. While no investment is risk-free, government bonds (T-Bonds) are just about as close as you can get.

    Retirement accounts

    Retirement accounts provide certain tax advantages as an incentive to save for the future. Let’s go over a few of the major retirement accounts and see which is right for you.

    401(k)

    A 401(k) with an “employer match” might be the ultimate investing vehicle, period. That “match” is key, though – many employers will fund your account dollar for dollar, matching any contributions you make yourself.

    If you’ve got most of your investment money in a 401(k) account, we recommend giving blooom a spin. They’re a robo advisr that’s totally dedicated to managing 401(k)s – that is, unlike other robo advisors, they won’t touch money you have in an IRA or other retirement vehicles. You can get a free 401(k) analysis with blooom, and if you decide to move ahead with them they’ll charge you a reasonable $10 a month to manage your account on an ongoing basis.

    Traditional IRA

    With this type of account, your contributions may qualify for a deduction on your tax return. In addition, there’s the potential that your earnings can grow tax-deferred until the time you need to withdraw them at retirement age. The primary argument with a Traditional IRA (vs. a Roth IRA) is that most feel they’ll be in a lower tax bracket when they retire, so paying taxes on this money at stage will be cheaper than paying them when they’re earned (considering the up-front deduction).

    Roth IRA

    With a Roth IRA, your contributions are after-tax and the money can potentially grow tax-free while you save. The big benefit here is that withdrawals at retirement time are tax-free, assuming you meet the required conditions. This is my number-one recommended retirement account for most people.

    Rollover IRA

    This is an account that’s created by rolling over another account, such as a company-sponsored 401(k). For example, if you have a 401(k) with an employer who you leave, you can roll that money over into a Rollover IRA.

    If you’re new to investing and want to begin putting money to work for the long-term, an IRA is where to start. Read more about the best places to open an IRA here.

    Advanced investing strategies

    Advanced investing strategies

    Individual stocks

    If you decide you want to venture out and buy individual stocks, we recommend you take a slow and steady approach. Don’t put more than 10 percent of your portfolio in individual stocks until you get very comfortable with what you’re doing.

    A great place to start is by reading about value investing, where we focus on heavy amounts of research and a “buy-and-hold” mentality.

    It’s important not to be afraid of the stock market, it really is one of the best places to grow your money.

    Real estate

    Real estate investing makes millionaires (just look at Donald Trump), but you don’t have to be a millionaire to start investing in real estate.

    Investing in real estate is a long-term investment that investors invest in for cash flow (the money you make from rental properties every month after all expenses are paid). Cash flow will also increase over time because rents will go up with inflation while your mortgage payments stay the same.

    Like any investment, though, it’s important to know the risks. And consider if you have what it takes to be a landlord.

    If you’re thinking about getting into the real estate market, we recommend checking out Fundrise. Most real estate investment platforms require you to be an accredited investor – meaning, you need to have a net worth of at least $1 million or an income of $200,000 a year. That’s prohibitive for… many of us. But with Fundrise you can invest with as little as $500.

    Crowdfunding

    Crowdfunding allows you to invest in peer-to-peer ventures such as lending.

    Sites like Lending Club allow everyday investors give personal loans to others. These loans go towards anything from debt consolidation to funding a wedding. You can read our full review of Lending Club here.

    Bottom-line advice

    If you’re new to investing and can afford to begin putting money away for retirement, I recommend everybody begin investing with a Roth IRA.

    If you already have a retirement account or need to invest money for another goal (like buying a home or starting a business), a regular brokerage account will do. Keep in mind that your capital gains—the money you earn when you sell a security for more than you paid for it—is taxable, as will certain dividends you receive.

    Should you DIY or get help with your investments?

    It’s important to know when it’s best to have a financial advisor and when it’s best to opt for a different investing platform. If you’re looking for real financial advice and you have quite a bit of money to handle, a face-to-face advisor will be much better at explaining things to you than any electronic form of advisor.

    Some people may choose to invest with a financial advisor because they want face-to-face interaction, professional advice, and don’t mind paying a premium for someone handling their money. Oftentimes, people with large sums of money to invest will hand it over to a financial advisor so they don’t have to do the work.

    So how do you find a financial advisor? It’s relatively easy to do as long as you know the right questions to ask. If you’re a millennial and are looking for a financial advisor (although, make sure you really need one), here’s a roadmap of the best advisors for you.

    Robo-advisors

    There are a bunch of great robo advisors out there, but not every robo advisor is right for every investor. We’ve put together a list of our favorite robo advisors and who they’re perfect for (depending on how much money you have to invest).

    How much do I have to invest?Where should I invest?
    Beginner: I have less than $500 to investBetterment
    Intermediate: I have more than $500 to investWealthfront
    Advanced: I have more than $1,000 to investM1 Finance

    Robo-advisors like Wealthfront and Betterment make investing accessible for everyone. These easy-to-use apps are more convenient, more affordable and have lower investment minimums than standard financial advisors.

    M1 Finance will recommend several expert portfolios to choose from depending on your finances, goals and preferences. But here’s why we placed them under the “advanced” category – they’ll also give you the option to pick your own stocks and ETFs. So if you want try your luck beating the market, M1 Finance might be the robo advisor for you.

    Online stock brokers

    If you want to DIY your investing, there are a lot of great brokerages for you to consider. You can typically do everything without ever having to speak to a person, which is nice for some people. Online brokers are also often much cheaper than a traditional brick and mortar broker where you’d meet face-to-face with a person.

    One of our favorite online brokers for new investors is TD Ameritrade. They’re running a solid sign-up bonus that gives you cash based on how much money you fund in your account. They’re a bit on the expensive side on a per-trade basis at $6.95, but they offer a great product with no minimum starting balance requirements.

    Ally Invest is another great option to consider, and at $4.95 stock trades it’s one of the cheapest around. You’ll need to meet a $500 minimum funding requirement to open an account, though. Other options include Fidelity, E*Trade, and Merrill Edge.

    Next steps

    These are the basics of investing—there’s plenty of directions you can take now that you know what you’re doing.


    Need a financial advisor?

    The above investment accounts are all great for do-it-yourself investors. However, if you find yourself wondering if it’s time to get professional help making a financial plan, it may be time to work one-on-one with a financial advisor. You can learn more about how to find a qualified financial advisor to help with your investment goals here.

    Get Matched with 5-Star Rated Financial Advisors in Your Area

    The Paladin Registry pre-screens financial planners and investment advisors. It’s free to use and there’s no obligation. Start now:

    Start investing today

    Low-fee roboadvisor with no minimum investment. Creates fully-automated portfolios based upon your desired allocation.

    Ally is our recommended online broker for more frequent trading. Pay just $4.95 per trade. Open a new account with at least $25K and get a $200 cash bonus! Open an account with at least $10K and enjoy 90 days of free trades!

    For investors looking for a one-stop full-service broker, Fidelity offers thousands of direct mutual funds, commission-free iShares ETFs, and reasonable $4.95 stock trades.

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    About David Weliver

    David Weliver is the founding editor of Money Under 36. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

    Comments

    We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 36.

    1. Austin Manning says:

      Hello David, first off I want to say that this was a well constructed guide. However, I do have one question while I was reading through the post. You mention to use mutual funds when investing but I was curious as to why as it is my understanding that mutual funds can take away from your savings due to high expense ratios. Is there something that I am misunderstanding?

    2. Grizzle says:

      Great guide you have here to investing, except one thing I was uncertain about. You recommend mutual funds but I wonder why. They have high management expense ratios that eat away at your savings. Why not go for ETFs over mutual funds when they find that index funds outperform anyways?

    3. Caroline says:

      Best guide I have ever seen. thx.

    4. Manu Yadav says:

      Hi David, A really helpful blog and i personally do like the mutual funds. I have been investing in them for a while and also will son invest in the stocks as well. Thank you for this relevant and helpful information.

    5. Bryan Bouchard says:

      Great post! Full of useful information on the complex subject of investing. Personally, real estate is my investment class of choice. What is yours?

    6. Kein Charlie says:

      Hi David, Nice guide. I always recommend Investing to exchange market, because are probably the best way to invest bucks to grow financially big. There’s always risk/reward. I like the picture you added (from $5K to $245K in 10 years), because, growing financially big is not possible overnight. It’s actually much better to focus on long time investment. I expect a bitcoin related post (it’s may be going up again). Thanks

    7. Leave a Reply

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